Answer:
If the company's total incremental cost of producing the number of units it wants to procure from the supplier is greater than the cost of buying from the seller, then the company will buy from the seller and increase profits.
Suppose a company produces a product 'X' that it sells at $100.
It can produce 2000 units, but it currently produces 1000 units.
It's current fixed costs are $15,000 but if production increases beyond 1000 units, its fixed costs will increase by another $10,000.
This product has a variable cost of $50 per unit.
The company receives an offer to buy its product from its supplier at $60 per unit.
The market demand for the company's product is 2000 units.
In this case, the total costs incurred by the company to produce an additional 1000 units will be:
In this case, looking only at costs, the company is indifferent between reaching full capacity and buying from the supplier.
If the total incremental cost is greater than the cost of buying from the supplier, the company will increase its profits by buying from the supplier, else it will prefer not to.
If the company is producing at full capacity, but the demand for its products is more than it can produce, then buying from the supplier will result in an increase in profits for the company, since this will help the company to take advantage of the high demand for its product.
