Substituting capital equipment in place of direct labor can be economically justified for the scenario where volumes are forecasted to increase. This is because capital equipment can provide higher productivity, efficiency, and quality than direct labor, especially when the demand for the product or service is high or growing. Capital equipment can also reduce the labor costs, such as wages, benefits, training, and turnover, that are associated with direct labor12. Therefore, investing in capital equipment can lower the unit cost and increase the profit margin of the product or service, as well as improve the customer satisfaction and loyalty.
The other scenarios are not likely to justify substituting capital equipment in place of direct labor, because they are either irrelevant or ineffective. Material prices are forecasted to increase (B) is a factor that affects the cost of inputs, not outputs. Substituting capital equipment in place of direct labor may not reduce the material costs, unless the capital equipment can use less or cheaper materials than direct labor. Implementing a pull system in production © is a method of managing inventory and production based on actual customer demand, rather than forecasts. Substituting capital equipment in place of direct labor may not facilitate the implementation of a pull system, unless the capital equipment can provide more flexibility and responsiveness than direct labor. Functional layouts are being utilized (D) is a way of arranging the production facilities according to the type of operation or function performed. Substituting capital equipment in place of direct labor may not improve the performance or efficiency of a functional layout, unless the capital equipment can reduce the setup time or transportation cost between different functions.
References:
Make-or-Buy Decision - Definition & Examples | Marketing Tutor
Make-or-Buy Decision - Overview, How It Works, Triggers
Make or Buy Decision - Definition & Examples | Marketing Tutor
Make or Buy Decision - What Is It, Examples, Factors, Advantages
