make or buy decision

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Make-or-buy decision
Business Spot
Taiwanese smart phone maker HTC Corporation is considering outsourcing manufacturing to other companies to improve its efficiency. Before building its own brand, HTC concentrated on manufacturing low-end smart phones for companies like Apple. However, in recent years, HTC has been under pressure from shareholders to reduce costs because of loss net operating income for the third quarter of 2013. Now, HTC wants to change its strategy; they want to concentrate on the research and development of high-end smart phones and outsource some of their low-end smart phone production to increase their sufficiency and lower the costs. In the smart phone industry, in order to improve efficiency, it is important for
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In the HTC outsourcing case, identifying and picking up the quantitative and qualitative factors is the first step. First, for the quantitative part, the variable and fixed costs of producing the smart phones must be taken into consideration. Usually, variable costs include direct materials, direct labor, and variable overhead. Also, we need to collect the data about the salary paid for workers and supervisors, depreciation of the equipment, and the allocated general overhead. The purchasing price of smart phones which the supplier offered 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 instead of producing them.
2. The analysis must also separate relevant costs from irrelevant 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
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