We all know that goods and service providers either manufacture or distribute products to consumers acting like an agent/broker.
We also know, Break-even Analysis tells us for how many units will the firm breaks even i.e., no profit or loss.
Let us assume the cost of buying is
P x Q
Let us assume the cost of making is
(VQ)+F
Here,
P= Price per unit
Q= Quantity in units
V= Variable cost per unit
F= Fixed costs
How we weigh Buy vs Make
PQ=(VQ)+F
Cancelling Q/Q = 1 from both sides, and sorting for Q later on
P= V + F
P - V = F
P - V / F = 1 (=Q)
So,
Q = F / P - V
and this is same as Break-Even point in Units.
Conclusion:
If the annual demand is less than Q, it is cheaper to buy from external vendors.
If the annual demand is more than Q, it is cheaper to manufacture inhouse.
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