Question

Management is often faced with the alternative of continuing to make a product or component internally, or going to an external source and purchasing the product or component. In gathering relevant information for these two alternatives, briefly identify the quantitative factors that should be considered. Are there any qualitative factors that should also be considered?

Answer 1

Following are the factors to be considered while evaluating the alternatives as above.

1. To consider making a component internally, firm should ensure required plant capacity, raw material and skilled manpower.

2. Whether the production of the component internally results in savings by using the idle capacity of the plant

3. Capital investment that is to be made for making the component internally

4. The total cost of making internally vis-a-vis purchasing outside

5. Qualitative factors like the quality of the component the firm creates if produced internally