Welcome to an installment of Aberystwyth Business School's Video Lecture Series.
These lectures are in-line with the A-level Business Studies Curriculum across the UK.
Our apologies for the videos being only available, currently, in English
A company is considering buying in a new product from a supplier at £350 per unit.
To produce 'in house' the fixed cost per year would be £130,000, and the total variable costs would be £80 per part.
Using the graphical method and the mathematical method, what would be the break-even point in terms of volume and cost for the make or buy decision?
Mathematical Method:
Q = Fc / (R-v)
Q = 130,000 / (350-80)
Q = 482 products
At 482 products, the cost of outsourcing matches the cost of making 'in house'. This is an outsourcing strategic decision point
Graphical Method:
ABC Limited is a manufacturing company. It has been asked by a customer to manufacture a new product. However, ABC are unsure whether they could produce the product in the time or to the quality that the customer needs in such a short period of time. The company has decided to outsource the product in the early stages until they can assure themselves that they can produce the product correctly.