Make-or-buy decision
Make-or-buy decision compares the costs a business can avoid by stopping in-house production against the purchase price from an external supplier.
Also known asoutsourcing decision
FrameworkRelevant costing
See it move
The infographic is a two-column comparison table contrasting the make and buy options. The "Make (in-house)" column lists avoidable costs: variable cost €30 plus avoidable fixed cost €8, totalling €38 per unit. The "Buy (supplier)" column shows a purchase price of €40, making in-house production the cheaper option by €2 per unit. A note clarifies that unavoidable fixed overhead of €10 is excluded from the analysis because it persists regardless of the decision and is therefore irrelevant to the choice.
The formula
Variables
- Variable manufacturing cost per unit (€)
- Fixed overhead per unit that genuinely disappears if in-house production stops (€)
Allocated fixed overhead that persists regardless of the decision is excluded from the comparison.
Variables
- External supplier's quoted purchase price per unit (€)
Positive result → continue making internally; negative result → outsource to the external supplier.
Check yourself
Castellan GmbH currently makes a component in-house at €55 per unit, comprising €28 variable cost and €27 allocated fixed overhead. Of the fixed overhead, €19 per unit is unavoidable (a dedicated machine lease) and €8 per unit would disappear if production stopped. An outside supplier quotes €38 per unit. What is the correct decision?