Break Even Analysis in Make or Buy:
Decisions about whether to buy a particular product or manufacture are very complicated. Yet the cost element associated in the procedure reduces it to simple problem which may be solved through break even analysis.
Consider if the item is bought,
then FC = 0
TCbuy = P × D
where P is the price and D is the demand.
If the item is made, then the total cost in making the product is the total of fixed and variable cost. therefore,
TCmake = (V × D) + FC
Break Even Demand (B) occurs when
TCbuy = TCmake
For demand less than B, buy is preferred as the cost linked with buying is lesser compared to that attached with the manufacture. If demand is greater than B, lower production cost/unit results in the offset of high fixed cost, thus making is preferred over buying.
Figure: Make-Buy Break Even Analysis