Analyze the make or buy decision and recommend the most profitable alternative. Assess the sensitivity of such decision to the external purchase…

To analyse the make or buy decision and determine the most profitable option for ABC Electronics Ltd., we will compare the net benefit under the both options and conduct a sensitivity assessment regarding the external purchase price. Benefit Under Current Scenario, when blades are Purchased Particulars No. Of Fans Per Fan (₹) Amount (₹) Per fan Contribution (₹) Sales 15,00,000 3,500 5,25,00,00,000 Purchase cost of Blade sets 12,00,000 615 (Note 1) (73,80,00,000) 300 Other VC 15,00,000 2,708 (Note 2) (4,06,20,00,000) Contribution (A) 45,00,00,000 Benefit Under Proposed Scenario, when blades will be in-house manufactured Particulars No. Of Fans Per Fan (₹) Amount (₹) Per fan Benefit (₹) Sales 16,50,000 3,430 5,65,95,00,000 Cost of Manufacture Blade sets 13,20,000 557 (Note 1) (73,52,40,000) 270.2182 Other VC 16,50,000 2708 (4,46,82,00,000) Marketing 16,50,000 4 (66,00,000) Contribution 44,94,60,000 Advertisement (36,00,000) Net Benefit (B) 44,58,60,000 Loss due to shift from buying to in-house making of blades Net Loss (A - B) 45,00,00,000 - 44,58,60,000 = 41,40,000 Note 1: Outside market price and manufacturing cost of blade sets. Outside market price of per set of blades = 615 Manufacturing cost per set of blades (DM + DL + Factory O/Hs Variable) = 380 + 60 + 117 = 557 Note 2: Analysis of Current Variable Cost Particulars Cost per fan (₹) Average VC 3,200 Purchase cost of blade per fan* (492) Other VC 2,708 *615 × 0.8 = 492 (As 15,00,000 fan requires 12,00,000 sets of blades. It means 1 fan require 12L/15L = 0.8 blade set) Sensitivity Analysis Let's determine at what purchase price where "make" and "buy" options are equally beneficial. To determine the break-even external purchase price at which benefit of in-house blade production (full) becomes equal to benefit under purchase (partial) option, we let X represent the supplier's price per set. Particulars No. Of Fans Per Fan (₹) Amount (₹) Sales 15,00,000 3,500 5,25,00,00,000 Purchase price of Blades 12,00,000 X (12,00,000X) Other VC 15,00,000 2,708 (4,06,20,00,000) Contribution 1,18,80,00,000 - 12,00,000X Current Situation Equated with Proposed Situation 1,18,80,00,000 - 12,00,000X = 44,58,60,000 74,21,40,000 = 12,00,000X So, X = 74,21,40,000 / 12,00,000 X = 618.45 It means, if the external purchase price of blade sets rises above - 618.45 then in-house production becomes more profitable option. Conversely, if the supplier continues to offer blade sets below - 618.45 then it is more economical for ABC Electronics to continue purchasing them externally. Alternative Solution To analyse the make or buy decision and determine the most profitable option for ABC Electronics Ltd., we will compare the net benefit under the both options and conduct a sensitivity assessment regarding the external purchase price. Benefit Under Current Scenario, when 12,00,000 blades (set) are Purchased and balance 3,00,000 blades (set) manufactured in-house Particulars No. Of Fans Per Fan (₹) Amount (₹) Per fan Contribution (₹) Sales 15,00,000 3,500 5,25,00,00,000 Purchase cost of Blade sets 12,00,000 615 (Note 1) (73,80,00,000) 300 Manufacturing cost of Blade sets 3,00,000 557 (16,71,00,000) Other VC 15,00,000 2,596.60 (Note 2) (3,89,49,00,000) Contribution (A) 45,00,00,000 Benefit Under Proposed Scenario, when all blades (set) will be in-house manufactured Particulars No. Of Fans Per Fan (₹) Amount (₹) Per fan Benefit (₹) Sales 16,50,000 3,430 5,65,95,00,000 Cost of Manufacture Blade sets 16,50,000 557 (Note 1) (91,90,50,000) 270.2182 Other VC 16,50,000 2,596.60 (4,28,43,90,000) Marketing 16,50,000 4 (66,00,000) Contribution 44,94,60,000 Advertisement (36,00,000) Net Benefit (B) 44,58,60,000 Loss due to shift from buying to in-house making of blades: Net Loss (A – B) 45,00,00,000 - 44,58,60,000 = 41,40,000 Note 1: Outside market price and manufacturing cost of blade sets. Outside market price of per set of blades = 615 Manufacturing cost per set of blades (DM + DL + Factory O/Hs variable) = 380 + 60 + 117 = 557 Note 2: Analysis of Current Variable Cost Particulars Total Cost (₹) Per Fan (₹) Total VC 4,80,00,00,000 Purchase cost of Blade sets (12,00,000 @ 615/-) 73,80,00,000 Manufacturing cost of Blade sets (3,00,000 @557/-) 16,71,00,000 2,596.60 Other VC (balance) 3,89,49,00,000 Therefore, Other Variable Cost per FAN will be - 2,596.60. Sensitivity Analysis Let's determine at what purchase price where "make" and "buy" options are equally beneficial. To determine the break-even external purchase price at which benefit of in-house blade production (full) becomes equal to benefit under purchase (partial) option, we let X represent the supplier's price per set. Particulars No. Of Fans Per Fan (₹) Amount (₹) Sales 15,00,000 3,500 5,25,00,00,000 Purchase price of Blades 12,00,000 X (12,00,000X) Manufacturing cost of Blade sets 3,00,000 557 (16,71,00,000) Other VC 15,00,000 2,596.60 (3,89,49,00,000) Contribution 1,18,80,00,000 - 12,00,000X Current Situation Equated with Proposed Situation: 1,18,80,00,000 - 12,00,000X = 44,58,60,000 74,21,40,000 = 12,00,000X So, X = 74,21,40,000 / 12,00,000 X = 618.45 It means, if the external purchase price of blade sets rises above - 618.45 then in-house production becomes more profitable option. Conversely, if the supplier continues to offer blade sets below - 618.45 then it is more economical for ABC Electronics to continue purchasing them externally.