Make-or-buy in the presence of uncertainty and private information

In textbook discussions of the make-or-buy problem, outsourcing is often justified on technological grounds. Suppliers may have better equipment, more capacity, or benefit from economies of scale. This teaching note demonstrates that even when technological issues are absent, outsourcing can be preferred. The benefit to outsourcing arises because the price set by a self-interested supplier can convey information to a buyer. Information conveyed by a supplier allows the firm to better tailor its production to the circumstance. The case also provides students an opportunity to apply basic concepts from economics, statistics, and mathematics to a common managerial accounting problem.