Fixed cost, marginal cost, and the decision to buy or make

The paper builds a formal model of the costs and benefits of producing intermediate goods internally as compared to buying partially produced inputs on the open market. The model centers on the link between the purchase of assets specific to a production process and the mean and variance of profits from the purchase. The central point of the paper is that even though purchases of assets specific to a production process can have an ambiguous impact on profits of the decision to make, the purchase of such assets has a tendency to reduce the variability of profits. This trade-off is at the heart of decision to buy or make. Copyright © 2004 John Wiley & Sons, Ltd.