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Chapter 6




                  7.2  Make or Buy decisions with a limiting factor

                  In the presence of a limiting factor, the following step-by-step approach could be
                  adopted with a make vs. buy question:



                             The saving per unit of each product is calculated. Saving = Purchases
                    1        price – VC to make.


                             Divide this by the amount of scarce resource (a.k.a. limiting factor) each
                    2        product uses. This gives the saving per unit of the limiting factor (LF).



                             Rank products. The higher the saving per unit of LF, the greater the
                    3        priority to make that should be given to the product.



                             Once the priorities have been decided, the scarce resource is allocated
                    4        to the products in the order of the priorities, until it is fully used up.


                             Any products with unsatisfied demand can be satisfied by buying from
                    5        the external source.





                     Illustrations and further practice


                     Now try TYU 4 ‘Make or Buy with a limiting factor’.




























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