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Explain the make-or-buy process and describe how to perform the financial calculations involved in the simple lease-or-buy example provided in this chapter. What are the main types of contracts if you decide to outsource? What are the advantages and disadvantages of each?

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Answer:

A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier.

The three main types of contracts if you want to outsource are

  1. Time and materials Contract
  2. Fixed Price Contract
  3. Target Cost Contract

Explanation:

Make-or-buy decisions, like outsourcing decisions, speak to a comparison of the costs and advantages of producing in-house versus buying it elsewhere.

There are many factors at play that may tilt a company from making an item in-house or outsourcing it.

Make-or-buy decisions must be based on the relevant cost of each option.

Relevant costs in make-or-buy decisions include all incremental cash flows.

Any cost that does not change as a result of the decision should be ignored such as depreciation and indirect fixed costs.

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