Question

Example: Make-or-Buy analysis- Mary and Sue, have decided to open a bagel shop. Their first decision is whether they should make the bagels on-site or buy the bagels from a local bakery. If they buy from the local bakery they will need airtight containers at a fixed cost of $1000 annually. They can buy the bagels for $0.40 each. If they make the bagels in-house they will need a small kitchen at a fixed cost of $15,000 annually. It will cost them $0.15 per bagel to make. They believe they will sell 60,000 bagels.

1. Mary and Sue wants to know if they should make or buy the bagels.

FCBuy + (VCBuy x Q) = $1,000 + ($0.40 x 60,000) = $25,000

FCMake + (VCMake x Q) = $15,000 + ($0.15 x 60K) = $24,000

2. Indifference Point

FCBuy + (VCBuy x Q) = FCMake + (VCMake x Q)

n$1,000 + ($0.40 x Q) = $15,000 + ($0.15 x Q)

Q = 56,000 bagels

Since the costs are equal at 56,000 bagels and Mary and Sue expect to use 60,000 bagels, they should make the bagels in-house

THE PART THAT I DONT UNDERSTAND IS THE INDIFFERENCE POINT. CAN YOU PLEASE BREAK THAT PART DOWN INTO MORE DETAIL PLEASE...

Answer 1

Answer:

So at the indifference point quantity the cost of both the options that is to make or to buy is same so that the person can opt for any option and both will lead to same cost. So to calculate Indifference point we need to equate both the cost by assuming the quantity produced to be any variable.

Working

Let us assume that no. of units at indifference point = x

Cost as per Make Decision = Fixed Cost + variable Cost

= 15000 + 0.15 * x = 15000 + 0.15x

Cost as per buy decision = Fixed Cost + Variable cost

= 1000 + 0.4 * x = 1000+ 0.4x

Since at indifferrence point cost at both the options is equal so equating both of them

15000 + 0.15x	=1000+ 0.4x
x	= 56000 units

So when 56000 units are produced cost of both options will be equal .

Proof

Cost If Bagels are made = 15000 + (0.15*56000) = 23400

Cost if Bagels are bought = 1000 + (0.4*56000) = 23400