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Home Managerial/Management/Cost Accounting Terms and Definitions Make or Buy Decision Definition

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Make or Buy Decision Definition:

Make or buy decision is a decision as to whether an item should be produced internally or purchased from an outside supplier.

Explanation of the Term "Make or Buy Decision":

Business decision that compares the costs and benefits of manufacturing a product or product component against purchasing it is called make or buy decision.

If the purchase price is higher than what it would cost the manufacturer to make it, or if the manufacturer has excess capacity that could be used for that product, or the manufacturer's suppliers are unreliable, then the manufacturer may choose to make the product. Manufacturers may also consider to make rather than buying because some wastes may become the raw materials of product under consideration. This assumes the manufacturer has the skills and equipment necessary, access to raw materials, and the ability to meet its own product standards. A company who chooses to make rather than buy is at risk of losing alternative sources, design flexibility, and access to technological innovations.



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