Purchasing and Financing 2024

Cost (R)
The decision whether to make or buy will depend on the required quantity. If only a small
quantity is needed it would be better to buy, but as larger quantities are required the cost
of investment will be offset against the cheaper unit prices of the parts and making could
become the better alternative.
The quantity at which it would be equally advantages to make or buy is known as the
“Break even point”. Any quantity beyond this point would suggest a Make-decision while
any quantity below this point will suggest a Buy-decision. As this point denotes the
quantity from which the production process breaks even, the technique to determine it is
called Break-Even-Analysis.
A Typical Make or Buy Decision Graph
Cost of Purchasing
Total Production Cost
Variable Production Cost
Fixed Production Cost
Break Even Point
Quantity (Units)
CLASS ASSIGNMENT:
A company wants to decide whether it would pay to produce a certain item at their own
factory or buy it from a supplier. The cost accounting department produced the following
figures:
o The production would require fixed costs of R500 000-00
o Each unit of output would yield labour and material costs of R1 200-00.
o The required item is available for R1 500-00 in the market.
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