IB BM HL 5.6.5 Make-or-Buy Decisions

[Maximum number: 2]

Jill Anderson operates a restaurant. Although Jill’s meals are viewed as being excellent quality, sales are slowing.

Jill Anderson

Jill Anderson operates a restaurant. Although Jill's meals are viewed as being excellent quality, sales are slowing. Jill is considering replacing existing meals with gluten-free meals. The following financial and forecast information is for the month of May 2018. Jill's restaurant can only produce either existing or gluten-free meals.

Table 1: Existing meals

Table 2: Estimated costs and price if Jill produces the gluten-free meals

A local gluten-free manufacturer, which is not part of Jill's existing supply chain, has offered to supply already prepared gluten-free meals at $\$ 8$ per meal. Jill is unsure whether to make or buy the gluten-free meals.

Using your answer from (b) (iii) and (iv), explain whether Jill should buy-in or make the gluten-free meals herself.

Buys in:
$1200 \times \$ 14-[2400+1200 \times \$ 8]$ $\$16800-[2400+9600]$ $\$16800-\$12000=\$4800$ profit
Which is $\$2800$ higher than in (iii) - the cost to make with profit of $\$2000$ .
Candidates do not have to repeat all of the working above if presented in the previous answers especially in (b)(iii).

OR:
Buys in:
$1200 \times \$ 6-2400$ (using contribution method)
$\$7200-\$2400=\$4800$ profit
Which is $\$2800$ higher than the profit of $\$2000$ if she makes them herself in part (iii).

Accept any other method.
Given the nature of the question regarding reference to (b)(iii) and (iv) it is expected that the candidates incorporate references to the change in contribution and or profit
Award [1] for just using the extra contribution to support but without reference to/ or calculation of profit before and after.
Award [1] for a response that mentions some relevant qualitative issues with reference to or comparison with the option to make.
Award [2] for a correct numerical answer with some references to the exact figures of profit before and after.
Do not credit a response that just says that Jill should accept the offer without any calculation or reference to profit or contribution when buying.
Please note:
Some candidate just referred to a fall in fixed cost- not to contribution or profit. Do not award.
Do not credit a response that does not demonstrate some attempt to calculate the option of buying or refer to profit after buying.
Allow OFR

IB Business Management HL 5.6.5 Hl Make or Buy Decisions Questions

Exam points

IB Business Management HL 5.6.5 Hl Make or Buy Decisions Questions question 1