Page 230 - DCOM508_CORPORATE_TAX_PLANNING

Unit 10: Tax Consideration in Specific Managerial Decisions

Notes
Example: Qualitative factors in make-or-buy decision are control over quality of the
component, reliability of suppliers, and impact of the decision on suppliers and customers, etc.

!
Caution The quantitative factors are actually the incremental costs resulting from making
or buying the component.
Make-or-buy analysis is conducted at the strategic and operational level. Obviously, the strategic
level is the more long-range of the two. Variables considered at the strategic level include analysis
of the future, as well as the current environment. Issues like government regulation, competing

firms, and market trends all have a strategic impact on the make-or-buy decision. Of course,
firms should make items that reinforce or are in-line with their core competencies. These are

areas in which the firm is strongest and which give the firm a competitive advantage.
Outsourcing provides companies with the freedom to concentrate their energies on key activities
that are critical to maintaining their competitive edge. This results in improvement of industrial
relations and rising labour productivity. For activities eligible for outsourcing, the key strategic
question is whether the firm can perform those service activities on a level that is comparable

with the best organisations in the world. If a service activity meets several criteria, the next step
is deciding whether the service is central to the firm’s core strategic activities. Moreover, to make

the best make-or-buy decision, companies must determine how that decision will affect fi nal
product quality and the company’s technology.

Factors Affecting Firms to Buy

Factors that may infl uence firms to buy a part externally include:

1. Lack of expertise
2. Suppliers’ research and specialised know-how exceeds that of the buyer

3. Cost considerations (less expensive to buy the item)
4. Small-volume requirements
5. Limited production facilities or insuffi cient capacity

6. Desire to maintain a multiple-source policy
7. Indirect managerial control considerations
8. Procurement and inventory considerations

9. Brand preference
10. Item not essential to the fi rm’s strategy

Elements of the “Make” Analysis

Elements of the “make” analysis include:
1. Incremental inventory-carrying costs

2. Direct labour costs
3. Incremental factory overhead costs

4. Delivered purchased material costs

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