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Chapter 7

Example 1

A manager is considering a make vs buy decision based on the following
estimates:
If made in-house If buy in and re-badge

$ $

Variable production costs 10 2
External purchase costs – 6

Ultimate selling price 15 14

You are required to assess the sensitivity of the decision to the external
purchase price.

What is the best decision?

Comparing contribution figures, the product should be bought-in and re-
badged:

If made in-house If buy in and re-badge

$ $

Contribution 5 6

Calculate the sensitivity (to the external purchase price)

For indifference, the contribution from outsourcing needs to fall to $5 per unit.
Thus the external purchase price only needs to increase by $1 per unit
(or $1/$6) = 17%. If the external purchase price rose by more than 17%, the
original decision would be reversed.

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