# Calculating the Most Profitable Way of Manufacturing a Product

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 Calculating the Most Profitable Way of Manufacturing a Product Gerrit Kubassa Dear all, I am struggling with the start of a project in which I need to figure out what way of supplying a customer with a certain product is most profitable (from buying raw materials till delivering to the customer)... We manufacture it and I got the BOM, but what do I need to do next to find the most profitable way and to decide upon make or buy?

 ABC - Most Profitable WayJayaram, MemberYou have got to sit with your engineering department and analyse the cost of making the product in house. Simultaneously, also try getting quotes for the same process from other vendors through your purchase team. Then compare and come to a conclusion. Of course you must also consider the opportunity cost of making it in house / outside if there is a constraint in factors of production.

 Calculating the Most Profitable Way of Manufacturing a ProductHariom Agrawal, MemberThe problem you have posed is very close to optimization of the supply chain. In this process, the best way is to identify the cost of each alternative for every activity and material through Activity Based Costing, and simulate the alternative cost with permutation and combination stage wise in a cumulative manner. This will help you in finding the optimum cost in producing as well as selling. The profit is the difference between the sales realization versus the cost incurred. So at the optimum cost for a given sale price, that amount will be the most profitable amount.

 Capacity and Logistic Cost ConsiderationsSudesh Bhikha, MemberIf your facility is running below capacity, then it would be advisable to factor in overall cost reduction to all products by increasing utilization of internal resources compared to net cash flow outflow from buying the product externally. Your fixed cost internally (for example depreciation) can be spread out over more products if you manufacture the product internally, compared to buying the product outside. There are other hidden cost issues that you need to factor when buying a product, like qualification cost of the product at supplier site, quality monitoring, logistic cost, additional inventory for intransit time, etc.

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