Exercise / Step 6 / Make or Buy
A concrete exercise to show you how to make the decision between manufacturing or subcontracting
You are, now, in the situation of a company which considers in-sourcing an activity that is currently run by a supplier.
Download and open the frame spreadsheet document.
Currently, you purchase 10,000 units per year at a unit price of $ 80.
What if we manufacture by ourselves?
Then, you need to buy a machine and evaluate your cost structure (labor, raw materials and overheads, as in step 5). Of course, you need a time horizon, a tax rate and a WACC, all provided in the spreadsheet.
The calculation looks like the ‘productivity case’ but it’s not about replacing one machine by another, it’s about replacing a sub-contractor by your own team.
First, calculate NPV and IRR, both demonstrate that this in-sourcing case is profitable.
