Make or Buy Decision Essay

Taiwanese voguish ph unity dissembler HTC Corporation is selling outsourcing manufacturing to different companies to improve its efficiency. Before building its own brand, HTC concentrated on manufacturing low-end hurt phones for companies like Apple. However, in recent years, HTC has been under pressure from shargonholders to reduce terms because of loss net operating income for the third quarter of 2013. Now, HTC complimentss to change its schema they want to concentrate on the research and development of high-end smart phones and source some of their low-end smart phone employment to increase their sufficiency and dishonor the terms.In the smart phone industry, in send to improve efficiency, it is of the essence(p) for the phone educaters to build more(prenominal) commoditized yields and univers tout ensembley outsource some products to manufacturers who kindle incur cheaper products. However, just as the Yuanta Securities analyst Dennis Chan says, thither are umteen factors that impression whether to make the stopping point to outsource. HTC definitely demand to consider numerous factors to decide whether they will continue reservation products or outsourcing (Dou, 2013). Problem acknowledgementThe case above is talking about how HTC suffers from a new pip about whether to continue producing smart phones or outsource them to some other manufacturing companies. in reality it is a make or buy finish problem in accounting. Make or buy decision is a decision to check out manufacturing a product in-house or purchasing it from an outside supplier. As every telephoner comes under increasing pressure to reduce termss and increase their return on assets, it shows an increased importance to managers whether to keep the activities, level(p) the key parts, in-house or outsource them (Gambino, 1980). Outsourcing is an central part in make-or-buy decision making.For HTC, if the production cost is much higher than outsourcing the low-e nd smart phone to other companies, or it doesnt have sufficient production cognitive content to produce it internally, outsourcing seems a better choice for the union. However, in the tune sector world, it is not prosperous to determine whether a make-or-buy decision is good for the company there are many factors to consider. The following part will describe the factors which have an effect on make-or-buy decisions. Accounting Method ExplanationMake-or-Buy DecisionMake-or-buy decisions occur in business when a company needs to decide whether to produce goods internally or to purchase them externally. This ordinaryly is an issue when a company has the capacity to manufacture products or they send packing purchase the products on the market. When analyzing a make-or-buy business decision, it is inevitable for managers to look at several factors. The analysis must envision thoroughly all of the costs related to manufacturing the products as well as all the costs related to pur chasing the product. 1. Quantitative factors and soft factors.The make-or-buy decision involves both quantitative analysis and qualitative analysis. Quantitative factors can be calculated and compared essential judgment and multiple opinions are compulsory when we want to examine some quantitative factors. Also, we need to consider various factors from all angles when the make-or-buy decision is used, because some of the factors involved can be quantified with certainty, while other factors cannot. Quantitative factors include things such as the availability of production facilities, production capacity, and all of the resources needed. Variable and fixed costs are also important factors when analyzing the make-or-buy decision. Similarly, quantitative costs also include the price of the product in the marketplace.The comparison between the production cost and purchasing cost is one of the most important processes in analyzing the make or buy decision. Qualitative factors are more difficult to measure than quantitative factors and more subjective judgment needs to be taken into consideration. For example, the written report and reliability of the suppliers, the curtain raising and the likelihood of changing or reversing the decision in the time to come, and the long-run anticipation regarding production or purchasing the product are all typical qualitative factors. In the HTC outsourcing case, identifying and picking up the quantitative and qualitative factors is the premiere step. First, for the quantitative part, the changeable and fixed costs of producing the smart phones must be taken into consideration. Usually, variable costs include direct materials, direct labor, and variable everywherehead. Also, we need to collect the data about the salary paid for workers and supervisors, disparagement of the equipment, and the allocated general overhead.The purchasing price of smart phones which the supplieroffered is another required factor when comparing production cost. Secondly, for the quantitative part, HTC needs to do a lot of research to know whether their supplier has a good reputation and reliability, and analysis the benefits and costs if they choose to purchase the smart phones from the supplier preferably of producing them. 2. The analysis must also separate relevant costs from contrary costs and look only at the relevant costs. When making the make-or-buy decision, it is necessary to distinguish between relevant and irrelevant costs. Relevant costs for making the product are all the costs that could be avoided by purchasing the product. An avoidable cost can be eliminated in whole or partially through choosing one alternative over another. In the HTC case, by choosing to purchase smart phones from another supplier, the cost of manufacturing the phones can be avoided.In reality, opportunity cost is very common when considering the relevant costs. Opportunity cost is the potential benefit that is given up when one altern ative is selected over another. Take the HTC case for example if the smart phone manufacturing facilities are idle, and the company accepts to outsource the smart phone, the opportunity cost is zero and it means there is no impact on the cost related to the opportunity cost. However, if the company decides to use the facility to produce another kind of product, the opportunity cost incurred. According to the different situations, it may change the managers decision. contrary costs are the costs that will be incurred no affaire whether the product is manufactured internally or purchased externally. There are deuce kinds of categories of irrelevant costs when we make the make-or-buy decision.The first one is suck cost, which is endlessly incurred during the operation process and cannot be avoided regardless of what decision the manager makes. In the HTC case, the manufacturing facilities have been purchased no matter if the smart phone is made or purchased from a supplier, the cos ts of the manufacturing facilities (fixed cost) have been incurred. Another irrelevant cost is future cost which has no impact on the alternatives. Following the HTC case, the company needs to promote the smart phone through advertisement in order to gain big sales. If the company is going to allocate the same ad fee to the promotion regardless of producing them or purchasing them, the future cost is an irrelevant cost when making the decision.The analysis must also consider the availability of the product and the tincture of the productunder each of the two scenarios. Other factorssuch as the availability of the product and the quality of the product under different alternativesare also important for an manager to make the make or buy decision. Following the HTC example, if the company chooses to produce the smart phone internally regardless of their deficiency in production capability, it can lead to poor quality products or low efficiency in production. In a long-run perspective , the company may not make a good decision. In order to get more hi-fi information about the products and the suppliers who can offer suitable prices and high quality products, the company needs to do research. This includes internal research and collecting business data from outside professional research companies which can provide more accurate information.ReferencesDou, E. (2013). HTC May Give In to Lure of Outsourcing. The Wall bridle-path Journal. Retrieved from http//blogs.wsj.com/digits/2013/10/23/htc-may-give-in-to-lure -of-outsourcing/?KEYWORDS=htc+Gambino, A. (1980). The make-or-buy decision. New York, N.Y. National Association of Accountants.