Compare the economic case for making a metal component in-house versus buying it from an outside fabricator or supplier.
The break-even quantity identifies the approximate order size where the modeled make and buy costs become equal. This is useful when one option has higher fixed costs but lower variable cost.
In-house production consumes shop capacity. If that capacity could instead be used for another profitable job, the economic comparison may need to include the contribution margin or opportunity cost of the displaced work.
The comparison should focus on relevant incremental costs. Existing fixed expenses that will remain regardless of the decision should generally not be treated as avoidable savings from outsourcing.
A make-or-buy decision evaluates whether a company should manufacture a component internally or purchase it from an outside supplier.
For metal fabrication, the decision can involve cutting, machining, welding, forming, finishing, assembly or complete fabricated components.
The economic calculation compares the relevant cost of producing the required quantity internally with the delivered cost of purchasing the same specification externally.
A common mistake is to include every accounting expense in the make option. The more useful economic comparison considers costs that actually change because of the decision.
For example, if a machine is already owned and its depreciation expense will continue whether the job is made or bought, that accounting expense may not be an avoidable cost in the short-term decision.
Conversely, additional overtime, consumables, material, incremental maintenance or external tooling may be directly attributable to the job.
Internal production often consumes more raw material than the finished part weight because of cutting kerf, nesting losses, offcuts, defects and other process waste.
The calculator applies the entered waste percentage to the internal material cost before calculating the total make cost.
Direct labor is calculated from the estimated labor hours per part and loaded labor rate. Machine cost is calculated from machine hours per part and the entered machine hourly rate.
Make sure the machine rate does not duplicate costs already included in maintenance, energy or overhead allocations.
The buy option should use the supplier's actual commercial price for the required specification and quantity. Freight and other purchasing costs should be added to obtain a delivered comparison.
A lower supplier unit price is not necessarily the lower total cost if tooling, freight, inspection or other charges are significant.
A purely accounting-based comparison can miss the value of internal production capacity. If making the job consumes machine or labor hours that could be used for another profitable order, that lost contribution may be economically relevant.
The optional opportunity-cost input lets you add a value per internal production hour when capacity is constrained.
Cost should not be the only factor in a make-or-buy decision. Consider:
What does make-or-buy mean?
It means deciding whether to produce a component internally or purchase it from an external supplier.
Should fixed overhead be included?
Only when it is relevant to the economic decision. Overhead that remains unchanged after outsourcing may not be an avoidable cost.
Should machine depreciation be included?
It depends on the decision horizon. Existing depreciation that continues regardless of the choice may not be relevant to a short-term make-or-buy decision.
Does the calculator include material waste?
Yes. The entered internal material waste percentage is applied to the material cost.
Should supplier freight be included?
Yes. If freight is required to receive the purchased component, it should be part of the buy cost.
Why can the break-even quantity be important?
The cheaper option can change with quantity when the two alternatives have different fixed and variable costs.
Can I include the value of lost internal capacity?
Yes. Enter an opportunity cost per internal hour when making the job would displace higher-value work.
Does the cheaper option automatically make the better business decision?
No. Lead time, quality, supplier risk, capacity, technical capability and strategic considerations can outweigh a purely financial difference.