Basil & Co: Build the Line or Keep Buying?

Operations

medium40 min0 submissions

BCG

Scenario

Basil & Co is a growth-stage quick service restaurants business in India. It currently buys a key component from a third-party supplier and is considering manufacturing it in-house.

Current position:

Annual volume: 265k units
Supplier price: ₹425 per unit, delivered

The in-house proposal:

Capital cost: ₹70 Cr, useful life 8 years
Variable cost in-house: ₹280 per unit
Additional fixed operating cost: ₹9 Cr per year

Complications:

Demand for the end product could move ±30% over the next three years
The supplier has offered a price reduction if a three-year commitment is signed
In-house production would take about 14 months to reach full yield

The COO is convinced building is obviously cheaper because the unit cost is lower.

Supporting data

current

annual volume k: 265
supplier price per unit: 425

in house

capex: 70
ramp months

14

asset life years

8

annual fixed opex

9

variable cost per unit

280

uncertainty

demand swing pct: 30

derived hints

breakeven volume k: 1228
annualised fixed cost: 17.8
contribution per unit: 145

Your task

Advise the COO. Your answer should provide:

Analysis — the economics of both options, computed, including the volume at which they break even.
Risks — what makes the in-house case fail, and what you would monitor.
Recommendation — a specific decision, and the volume threshold that would reverse it.

State any assumptions you make.

Ready to move forward? Up next: Wavelength Media: Review This DCF Before It Goes to the ICNext question

How you'll be graded

100 points, 60% to pass.

recommendation20
risk assessment25
problem structuring25
quantitative analysis30

Hint

Reveal suggested structure

Fixed vs variable split; breakeven volume; demand risk against irreversible capex; option value of the supplier deal