Explain the make-or-buy process and describe how to perform the financial calculations involved in the simple lease-or-buy example provided in this chapter. What are the main types of contracts if you decide to outsource? What are the advantages and disadvantages of each?

A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier.

The three main types of contracts if you want to outsource are

Explanation:

Make-or-buy decisions, like outsourcing decisions, speak to a comparison of the costs and advantages of producing in-house versus buying it elsewhere.

There are many factors at play that may tilt a company from making an item in-house or outsourcing it.

Make-or-buy decisions must be based on the relevant cost of each option.

Relevant costs in make-or-buy decisions include all incremental cash flows.

Any cost that does not change as a result of the decision should be ignored such as depreciation and indirect fixed costs.

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