Final answer:
The make-or-buy decision is sensitive to volume and involves choosing whether to make goods in-house or to buy from an outside supplier. The indifference point is when the cost to buy equals the cost to make, and decisions are affected by substitution and income effects within budget constraints.
Step-by-step explanation:
The make-or-buy decision is an important analysis conducted by businesses to decide whether it is more cost-effective to produce the needed goods or services in-house (make) or purchase them from an outside supplier (buy). This decision is closely related to cost accounting and managerial accounting. This decision-making process is sensitive to volume, meaning that the quantities needed can significantly affect whether making or buying is more cost-efficient.
When the cost to buy equals the cost to make, companies may be indifferent as there is no cost advantage to either option. However, there may still be other factors to consider such as quality, control, and long-term strategic implications. The indifference point references the specific quantity at which the costs are equal. On the other hand, when the cost to buy is higher than the cost to make, companies will find it less expensive to produce the item themselves.
It's important for businesses to analyze all economic factors—such as the substitution effect and the income effect—which play roles in the utility-maximizing choice on a budget constraint and can influence the make-or-buy decision.