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Make vs. Buy

What is a make or buy decision for a firm?

Sunk Costs

A firm entering into an agreement with a marketing agency and need to pay the fee upfront is termed as sunk cost. Here during the course, let's say you do-not yield any results from this and thereby the cost of the fee is sunk (in metaphorical sense)

  • This is a situation for the firm when it has to decide whether to buy from other source (outsource) and sell (avoids investing in capital) or make it on its own via investing in additional capital that is incurred to do so.

  • Sunk cost also is one of the important factor in make or buy decision for a firm.

    Example

    'Bata' decided it is better to outsource its operations of footwear making to several local firms than to produce it on its own. One such model could be it gives specifications of the models to be produced along with the quantity and Bata brands the foot wear with its logo and sells to the customers.So for Bata buy was the decision over make.

Firm Controlling the Market

A firm has control of price to fix on the commodity or quantity to produce or both.

  • In a monopoly market, a firm can control both price and quantity
  • In a competitive markets, only quantity can be controlled