Special Technique

Function - Cost Worth Analysis

Function Analysis System Technique
Weighted Evaluation Method
Evaluation Matrix
Life Cycle Cost

Function - Cost Worth Analysis

Make or Buy Technique

Cost a vital element of value
Cost effectiveness of a product reduction of unnecessary
costs Make or Buy technique is followed
Imagine a situation for a product AB:
Element of cost

Cost of Producing
100 Pcs (Rs)

Cost per Pc (Rs)

Direct Material

500.00

5.00

Direct Labour

150.00

1.50

Variable Overhead

100.00

1.00

Fixed overhead

250.00

2.50

Total

1000.00

10.00
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Make or Buy Technique

The cost of above product in market Rs. 8.00 / piece
Above data suggest to buy the product
But it may be erroneous. How?
Marginal cost has to be analysed
What is Marginal cost?
Summation of cost required for producing one extra unit
of product at certain level of production

Make or Buy Technique

Element Cost of Producing
of cost
100 Pcs (Rs)

Cost of Producing
101 Pcs (Rs)

Increase in
Cost (Rs)

Direct
Material

500.00

505.00

5.00

Direct
Labour

150.00

151.50

1.50

Variable
Overhead

100.00

101.00

1.00

Fixed
overhead

250.00

250.00

Total

1000.00

1007.50

7.50

The summation of variable cost per unit

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Make or Buy Technique

Outsourcing is closely related to make or buy decision
Most of the electronic items manufactured and software
systems developed were from Asia, for organizations in USA
and Europe.

Make or Buy Technique

Both Quantitative and Qualitative aspects should be considered

In quantitative aspect, the marginal cost has to be calculated.

Further, the possible environments are considered during decision

making phase.
1. Released capacity is redundant
2. The capacity released is partly utilized
3. The capacity released is fully utilized
4. New additional facilities have been added.
Make or Buy Decision Matrix is formulated.
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Make or Buy Technique

The following qualitative aspects may change the decision

1. The product is abundantly available in the market and of
same quality.
2. The quantity requirement is very low and the investment for
manufacturing is not economical.
3. The manufacturing process should be kept secret.
4. When there is an increase in raw material cost.

Make or Buy Decision Matrix

Utilization

Capa
city
Environme
Redu
nt
ndan Partial
t
Related
capacity
redundant

Yes

Full

Production
capacity
partly utilized

Yes

Production
capacity fully
utilized

Yes

Additio
nal
Capacit
y

Cost
Relationship

Decisi
on

Marginal cost >

Purchase price

Buy

Marginal cost +
Avoidable cost >
Purchase price

Buy

Total cost >

Purchase price

Buy

Use of
Marginal cost + new
additional
Yes
facility cost >
Buy
facility When the costs < Purchase price, the decision
Purchase
will beprice
Making

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Make or Buy Technique

Example:

Case study of Ashok Leyland

Initially when production was in limited quantity, the company made

their components and sub-assemblies.

Recent days, the production has increased that all the components
are outsourced and only assembly occurs in Ashok Leyland
Workshop.

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