{"id":621,"date":"2018-04-19T20:02:04","date_gmt":"2018-04-19T20:02:04","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/?post_type=chapter&#038;p=621"},"modified":"2024-04-29T17:34:28","modified_gmt":"2024-04-29T17:34:28","slug":"make-or-buy-decisions","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/chapter\/make-or-buy-decisions\/","title":{"raw":"Make or Buy Decisions","rendered":"Make or Buy Decisions"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Create a report outlining the data to support a make or buy decision<\/li>\r\n<\/ul>\r\n<\/div>\r\nOk, so back in Module 11: Relevant Revenues and Costs we talked about the make or buy decision. This decision has several components. Hupana could make their awesome soles of the shoes they sell, or they can continue to buy them from the supplier they currently use. The supplier charges $5.00 per pair and is a great vendor! They deliver on time, and have excellent customer service! Hupana needs to look at the costs and make a decision.\r\n<table style=\"border-collapse: collapse; width: 100%;\" border=\"1\">\r\n<tbody>\r\n<tr>\r\n<td style=\"width: 53.8461%; text-align: center;\">Hupana Make or Buy Decisions<\/td>\r\n<td style=\"width: 46.1538%; text-align: center;\" colspan=\"2\">Relevant Costs<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 53.8461%;\"><\/td>\r\n<td style=\"width: 23.3618%; text-align: center;\">Make<\/td>\r\n<td style=\"width: 22.792%; text-align: center;\">Buy<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 53.8461%;\">Direct Materials ($2.50 per sole x 2000 soles)<\/td>\r\n<td style=\"width: 23.3618%; text-align: right;\">$5,000.00<\/td>\r\n<td style=\"width: 22.792%; text-align: right;\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 53.8461%;\">Direct Labor (.1hr\/hole at $20\/hour)<\/td>\r\n<td style=\"width: 23.3618%; text-align: right;\">$4,000.00<\/td>\r\n<td style=\"width: 22.792%; text-align: right;\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 53.8461%;\">Variable Overhead (.1hr\/sole at $3\/hour x 2000 soles)<\/td>\r\n<td style=\"width: 23.3618%; text-align: right;\">$600.00<\/td>\r\n<td style=\"width: 22.792%; text-align: right;\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 53.8461%;\">Depreciation of Equipment (not relevant)<\/td>\r\n<td style=\"width: 23.3618%; text-align: right;\"><\/td>\r\n<td style=\"width: 22.792%; text-align: right;\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 53.8461%;\">Allocation of fixed overhead (not relevant)<\/td>\r\n<td style=\"width: 23.3618%; text-align: right;\"><\/td>\r\n<td style=\"width: 22.792%; text-align: right;\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 53.8461%;\">Cost of buying<\/td>\r\n<td style=\"width: 23.3618%; text-align: right;\"><\/td>\r\n<td style=\"width: 22.792%; text-align: right;\"><span style=\"text-decoration: underline;\">$10,000.00<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 53.8461%;\">Total Cost<\/td>\r\n<td style=\"width: 23.3618%; text-align: right;\"><span style=\"text-decoration: underline;\">$9,600.00<\/span><\/td>\r\n<td style=\"width: 22.792%; text-align: right;\"><span style=\"text-decoration: underline;\">$10,000.00<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 53.8461%;\">Difference in favor of <strong>making<\/strong><\/td>\r\n<td style=\"width: 23.3618%; text-align: center;\" colspan=\"2\">$400<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nAt first glance, it looks like bringing the making of the soles in house would save Hupana money! The total costs to make them, is less than continuing to buy them. Remember the fixed overhead happens whether we make or buy the soles, thus that is not a relevant expense. Also, if you think back to the budget for Hupana, they already had the equipment purchased, so that is a sunk cost (a cost we can\u2019t recoup no matter which decision we make), so again, it isn\u2019t relevant to this decision.\r\n\r\nThere are other things \u00a0to think about though. Is Hupana missing another opportunity, such as adding a product line, by manufacturing in house? What about a potential learning curve to make them? The numbers don\u2019t always tell the entire story, so management will need to look at all of the options before making this decision.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/c95d1bba-b9fd-455a-b28e-73a9b2863477\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Create a report outlining the data to support a make or buy decision<\/li>\n<\/ul>\n<\/div>\n<p>Ok, so back in Module 11: Relevant Revenues and Costs we talked about the make or buy decision. This decision has several components. Hupana could make their awesome soles of the shoes they sell, or they can continue to buy them from the supplier they currently use. The supplier charges $5.00 per pair and is a great vendor! They deliver on time, and have excellent customer service! Hupana needs to look at the costs and make a decision.<\/p>\n<table style=\"border-collapse: collapse; width: 100%;\">\n<tbody>\n<tr>\n<td style=\"width: 53.8461%; text-align: center;\">Hupana Make or Buy Decisions<\/td>\n<td style=\"width: 46.1538%; text-align: center;\" colspan=\"2\">Relevant Costs<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 53.8461%;\"><\/td>\n<td style=\"width: 23.3618%; text-align: center;\">Make<\/td>\n<td style=\"width: 22.792%; text-align: center;\">Buy<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 53.8461%;\">Direct Materials ($2.50 per sole x 2000 soles)<\/td>\n<td style=\"width: 23.3618%; text-align: right;\">$5,000.00<\/td>\n<td style=\"width: 22.792%; text-align: right;\"><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 53.8461%;\">Direct Labor (.1hr\/hole at $20\/hour)<\/td>\n<td style=\"width: 23.3618%; text-align: right;\">$4,000.00<\/td>\n<td style=\"width: 22.792%; text-align: right;\"><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 53.8461%;\">Variable Overhead (.1hr\/sole at $3\/hour x 2000 soles)<\/td>\n<td style=\"width: 23.3618%; text-align: right;\">$600.00<\/td>\n<td style=\"width: 22.792%; text-align: right;\"><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 53.8461%;\">Depreciation of Equipment (not relevant)<\/td>\n<td style=\"width: 23.3618%; text-align: right;\"><\/td>\n<td style=\"width: 22.792%; text-align: right;\"><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 53.8461%;\">Allocation of fixed overhead (not relevant)<\/td>\n<td style=\"width: 23.3618%; text-align: right;\"><\/td>\n<td style=\"width: 22.792%; text-align: right;\"><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 53.8461%;\">Cost of buying<\/td>\n<td style=\"width: 23.3618%; text-align: right;\"><\/td>\n<td style=\"width: 22.792%; text-align: right;\"><span style=\"text-decoration: underline;\">$10,000.00<\/span><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 53.8461%;\">Total Cost<\/td>\n<td style=\"width: 23.3618%; text-align: right;\"><span style=\"text-decoration: underline;\">$9,600.00<\/span><\/td>\n<td style=\"width: 22.792%; text-align: right;\"><span style=\"text-decoration: underline;\">$10,000.00<\/span><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 53.8461%;\">Difference in favor of <strong>making<\/strong><\/td>\n<td style=\"width: 23.3618%; text-align: center;\" colspan=\"2\">$400<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>At first glance, it looks like bringing the making of the soles in house would save Hupana money! The total costs to make them, is less than continuing to buy them. Remember the fixed overhead happens whether we make or buy the soles, thus that is not a relevant expense. Also, if you think back to the budget for Hupana, they already had the equipment purchased, so that is a sunk cost (a cost we can\u2019t recoup no matter which decision we make), so again, it isn\u2019t relevant to this decision.<\/p>\n<p>There are other things \u00a0to think about though. Is Hupana missing another opportunity, such as adding a product line, by manufacturing in house? What about a potential learning curve to make them? The numbers don\u2019t always tell the entire story, so management will need to look at all of the options before making this decision.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Questions<\/h3>\n<p>\t<iframe id=\"assessment_practice_c95d1bba-b9fd-455a-b28e-73a9b2863477\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/c95d1bba-b9fd-455a-b28e-73a9b2863477?iframe_resize_id=assessment_practice_id_c95d1bba-b9fd-455a-b28e-73a9b2863477\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-621\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Make or Buy Decisions. <strong>Authored by<\/strong>: Freedom Learning Group. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":62559,"menu_order":8,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Make or Buy Decisions\",\"author\":\"Freedom Learning Group\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"f9acb49e-e3f1-4650-91f8-2048b86c69f7, df3e5421-6bc3-417b-8060-8482a4ec4816","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-621","chapter","type-chapter","status-publish","hentry"],"part":111,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/621","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/users\/62559"}],"version-history":[{"count":12,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/621\/revisions"}],"predecessor-version":[{"id":4153,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/621\/revisions\/4153"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/parts\/111"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/621\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/media?parent=621"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapter-type?post=621"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/contributor?post=621"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/license?post=621"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}