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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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