Evaluating Production Decisions: Cost to Buy (CTB) vs. Cost to Make (CTM)
- As an owner of a coffee shop you'd need to decide whether to bake your own pastries or buy it from a supplier.
- This decision hinges on comparing the Cost to Buy (CTB) and the Cost to Make (CTM).
- By understanding these costs, you can make informed choices that impact profitability, quality, and operational flexibility.
Cost to Buy (CTB): What Does It Include?
Definition
Cost to Buy (CTB)
The total expense incurred when purchasing goods or services from an external supplier.
Components of CTB
- Supplier Costs: The price paid to the supplier for the product or service.
- Transportation Costs: Expenses related to shipping, handling, and delivery.
- Quality Control Costs: Inspections, testing, and potential rework if the purchased goods don’t meet standards.
A coffee shop buying pastries from a supplier would include the cost per pastry, delivery fees, and any expenses related to checking the pastry's quality.
Advantages of Buying
- Simplicity: Reduces the complexity of operations.
- Focus: Allows the business to concentrate on core activities.
- Scalability: Easier to adjust supply based on demand.
Disadvantages of Buying
- Less Control: Limited influence over quality and production timelines.
- Dependency: Reliance on suppliers can lead to disruptions.
- Potentially Higher Costs: Suppliers may charge a premium for their services.
When calculating CTB, don’t forget to factor in hidden costs like delays or quality issues that might arise from relying on external suppliers into your answer.
Cost to Make (CTM): What Does It Include?
Definition
Cost to Make (CTM)
The total expense incurred when producing goods or services internally.
Components of CTM
- Raw Materials: The cost of inputs required for production.
- Labor Costs: Wages for employees involved in the production process.
- Equipment and Maintenance: Depreciation, repairs, and operational costs of machinery.
- Overheads: Utilities, rent, and other indirect costs associated with production.
So if you decide to bake your own pastries for your coffee shop, your CTM would include flour, yeast, the salaries of pastry chefs, oven maintenance, and electricity.
