Make-vs-Buy & Outsourcing Break-Even Analyzer

About the Make-vs-Buy & Outsourcing Break-Even Analyzer

Decide whether to make a part or product in-house or buy it from a supplier, on the costs that really change between the two. Enter what a unit costs you to make — materials, labour minutes and rate, variable overheads, power, tooling, packing, your yield and rework — the fixed costs you would avoid by buying, one-time costs, your capacity and what that capacity could earn on other work; then the supplier's price with its price breaks, freight, duty you cannot claim back, inspection, the defect rate and what a defective unit costs you, and the extra stock a distant supplier needs.

The page gives the cheaper option and what it saves a year, the cost of a unit each way, the break-even volume where the two cost the same, a chart of both against volume, how far each figure can move before the decision changes, the totals over the years with a discount rate, and a score for the factors that are not money. Nothing is uploaded.

Without a pass, the free preview shows the cheaper option and what it saves in full with the first rows of each table; every other figure, the chart in full and the report come with a Premium pass.

Common uses

• Deciding whether to move a part to a job worker, a contract manufacturer or an importer.
• Bringing outsourced work back in-house when volumes grow.
• Checking a supplier’s quote against your own full relevant cost before you negotiate.
• Capacity planning: making up to capacity and buying the peak.
• Coursework on relevant costing and make-or-buy decisions.

Which costs count

Only the costs that differ between the two options decide (OpenStax):

• Relevant to making: the variable costs of each unit, the fixed costs that buying would avoid (a supervisor, a lease, a maintenance contract), one-time costs to start making, and what the capacity would earn on other work (its opportunity cost).
• Not relevant: fixed costs that stay whichever you choose, such as a share of the factory's rent or of head-office costs. The page shows them and leaves them out.
• Relevant to buying: the price at your volume and everything it takes to land and use a bought unit — freight, duty and taxes you cannot claim back (GST you claim as input tax credit is not a cost), packing, inspection, defects, the extra stock and its carrying cost, and the cost of managing the supplier.

The formulas

• Cost of a good unit made = (materials + labour + variable overheads + power + tooling) ÷ yield + rework + packing
• Make, a year = cost of a good unit × units (above capacity: plus the overtime premium, or the rest bought) + avoidable fixed costs + one-time costs ÷ years + opportunity cost
• Landed cost of a bought unit = (price + freight) × (1 + duty) + packing + inspection + defect rate × cost of a defect
• Buy, a year = landed cost × units + carrying cost of the extra stock + fixed costs of buying + one-time costs ÷ years
• Break-even volume = where the two lines cross: with fixed costs F and variable costs v, (F make − F buy) ÷ (v buy − v make)
• With a discount rate, one-time costs become a yearly cost with the capital recovery factor r ÷ (1 − (1 + r) to the power −n), and the totals over the years are present values.

Price breaks and capacity

Supplier prices that fall with volume are entered as breaks: the price from a quantity on applies to every unit of a year of that volume. Above your capacity, making means overtime at the premium you enter, or making up to capacity and buying the rest. Both bend the cost lines, so the page looks for every volume where they cross, not just one.

What could change the decision

For the supplier’s price, materials, labour, yield, freight, defects, avoidable fixed costs and volume, the page finds the value at which making and buying would cost the same, with everything else as you entered it, and puts the ones closest to it first; a table shows what 20 % less or more of each does. A decision that flips on a 3 % change in one price is a close call: get firm quotes before you move work.

Beyond cost

Quality control, security of supply, flexibility, know-how and the focus of your people often decide when the costs are close. Give each a weight and score each option from 1 to 5; the report shows the weighted scores beside the costs. Outsourcing also makes you depend on the supplier’s quality, delivery and price over the years, which a cost comparison of one year does not show.

Limitations

• Costs are taken as straight lines between the price breaks and the capacity: step costs inside a range (a second shift, a bigger machine) need a scenario of their own.
• Inflation, currency changes and price rises over the years are not modelled; compare scenarios for them.
• The opportunity cost of capacity is the contribution you enter; it is a cost of making only when that other work really exists.
• An estimate for a decision, not a quotation, a valuation or tax advice.

Privacy

On this device; its files download once

Everything happens in your browser. What you enter or open here is not uploaded or stored by MySmartCoPilot. Downloads the spreadsheet writer, the PDF writer and its fonts from this site the first time they are needed; your figures never leave this browser.