External buying decisions, Strategic Management

The group consolidated financial results would normally be effected, if an internal buyer uses their autonomy and makes a decision to buy outside the group, rather than buy internally from another division.  To calculate how worse off the group will be, you would need to compare the relevant cost of the internal seller making the product, to the external market price the external supplier will charge the buyer.  For example if an internal seller currently supplies a product to an internal buyer, the cost is normally the variable (marginal) cost of each unit  produced along with  any  other avoidable  'specific' fixed overhead  incurred when making the product e.g. avoidable fixed overhead incurred because the product is made and  avoidable if  the seller discontinues production.  The internal relevant cost would be compared with the external market price the alternative supplier would charge. The difference between this internal and external relevant cost will measure how worse off or better of group financial results would be. 

As far as the internal buyer is concerned the decision about using an external supplier is often one of financial reason, therefore external buying decisions will normally improve a buyer's internal financial results.   From the internal sellers perspective their financial results would normally deteriorate due to the loss of internal business.

Posted Date: 8/9/2013 3:13:49 AM | Location : United States







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