Make and Buy Examples

2) Company ‘Z’ produces a component in a dedicated department, 1,000 units are produced a year. The unitary costs are
as followed:
Direct Material €50
Direct Labour €80
Machinery Depreciation €40
Machinery Power (variable part) €20
Industrial General Overhead €30
TOTAL UNITARY COST €220
Company ‘Y’ offers the same component at a unitary price of €170. Having the information as followed, would it be
economically convenient for company ‘Z’ for accept ‘Y’s offer?
- machineries used are not employable in other productions, nor sellable (useful residual life: 4 years)
- machinery used has a counter measuring the amount of power used
- direct labour can be employed in other departments


Solution:
MAKE (ceasing) BUY (raising)
COST TO BUY €170
DIRECT MATERIAL €50
DIRECT LABOUR €80
MACHINERY POWER €20


TOTALS €150 €170
As the cost to make is less than the cost to buy, it is more convenient to MAKE.