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Relevant costing

Make or buy – other issues

In addition to the relative cost of buying externally compared to
making in-house, management must consider a number of other
issues before a final decision is made.

 Reliability of external supplier: can the outside company be relied upon to
meet the requirements in terms of:

– quantity required

– quality required

– delivering on time

– price stability.

 Specialist skills: the external supplier may possess some specialist skills that
are not available in-house.

 Alternative use of resource: outsourcing will free up resources which may be
used in another part of the business.

 Social: will outsourcing result in a reduction of the workforce? Redundancy
costs should be considered.

 Legal: will outsourcing affect contractual obligations with suppliers or
employees?

 Confidentiality: is there a risk of loss of confidentiality, especially if the
external supplier performs similar work for rival companies.

 Customer reaction: do customers attach importance to the products being
made in-house?

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