Make and Buy decision making

In Make or Buy we have to decide how many units of a product should be made in-house (manufacture within the company) and how many units should be bought from the outside supplier because we have limited resources (i.e. 8000 material kg) so we need to apply Key Factor Analysis which is the same as in Throughput accounting.

Steps:
In case if we are making product in-house (ourselves) we need to calculate:

1) Saving cost per unit
2) Material Kgs per unit
3) Saving cost per kg
4) Rank
5) Optimal Production Plan

We make products in-house to the limited resource of 8000 kg of material and whatever we cannot make ourselves we will buy-in from the outside supplier because we have no choice left.

We make the product whichever gives the highest saving cost per kg to be produced first then the second best would be produced and so on.