BIZOMAT Tools · Decide
Make or Buy (quick check)
Should you make it yourself or outsource it?
Compares the annual cost of making a part in-house with buying it, and finds the volume at which the cheaper option changes.
Open the calculatorRuns in your browser. No account needed.
How this tool works
Inputs, units and where to find them
| Input | Unit | Typical source |
|---|---|---|
| Annual quantity | units | Sales forecast or MRP annual demand for the part |
| Internal variable cost / unit | $ | Costing system: material, direct labour and variable overhead per unit |
| Internal setup + tooling | $ | Annual tooling, set-up and fixed costs that exist only if you make the part |
| Supplier price / unit | $ | Written supplier quotation at the forecast volume |
| Freight + supplier fixed cost | $ | Freight, supplier tooling or annual fixed charges from the quotation |
What each input means
Open an input to see what it is, its units, the worked example and the common mistakes, with a small diagram.
What this means: Annual quantity
- What it is
- How many of the part you expect to need in a year, whichever way it is sourced. Both annual totals and the crossover check are worked out at this volume.
- Units and format
- Enter a number in units: a count of units. The form accepts 1 units or more.
- Example
- The form opens with 10000 units as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- Higher volume favours the option with the lower unit cost, because fixed costs are spread over more units.
- Get it right
- Use the same year for every cost below; a monthly volume against annual fixed costs gives the wrong answer.
What this means: Internal variable cost / unit
- What it is
- What it costs you to make one more unit in-house: material, direct labour and variable overhead together, leaving out fixed costs that are entered separately.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $0 or more.
- Example
- The form opens with $2.5 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- Multiplied by the annual quantity and added to the make total.
- Get it right
- Do not include fixed overhead here; it is already in the internal set-up and tooling figure.
What this means: Internal setup + tooling
- What it is
- Fixed cost that exists only if you make the part yourself, such as tooling, fixtures, set-up and programming. The tool adds it once to the annual make total.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $0 or more.
- Example
- The form opens with $5000 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A higher fixed cost raises the make total and moves the crossover volume up.
- Get it right
- Include only costs that would disappear if you bought the part; shared overhead that stays either way is not relevant.
What this means: Supplier price / unit
- What it is
- The price per unit a supplier charges at your volume, from a written quotation, before freight and any one-off charges.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $0 or more.
- Example
- The form opens with $3.2 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- Multiplied by the annual quantity and added to the buy total.
- Get it right
- Check that the quoted price applies at your annual volume; price breaks at other volumes change the answer.
What this means: Freight + supplier fixed cost
- What it is
- Cost of buying that does not scale with each unit: freight lumped per year, supplier tooling, account or set-up charges. It is added once to the annual buy total.
- Units and format
- Enter a number in $: an amount of money; use one currency for every money input. The form accepts $0 or more.
- Example
- The form opens with $1000 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- A higher fixed buy cost raises the buy total and lowers the crossover volume.
- Get it right
- If freight is charged per unit, add it to the supplier price instead so it scales with volume.
Method and formulas
- Make total = quantity × internal unit cost + internal fixed cost
- Buy total = quantity × supplier unit price + supplier fixed cost
- Crossover volume = (internal fixed − supplier fixed) ÷ (supplier unit price − internal unit cost)
- Decision robust if the crossover is at least 25% away from the entered volume
Limitations
- Uses relevant (avoidable) costs only if you enter them that way
- Ignores capacity, quality, lead time, intellectual property and supply risk
- Single volume and constant unit costs; no price breaks
Typical uses
- First screen of a sourcing decision
- Checking whether a supplier quote is worth pursuing
- Re-testing a past decision after volume or price changes
Who it is for
- Production and operations managers
- Purchasing and supply chain staff
- Owners of small manufacturing businesses
What you get
- MAKE or BUY at the entered volume
- Annual cost of each option and the difference
- Crossover volume where the preference changes
Interpreting the result
- A crossover close to your volume means the decision is sensitive: test both forecasts
- A large cost advantage still needs the non-cost checks to pass
- Use the detailed make-or-buy tool when freight and overhead matter
References
- Relevant costing for make-or-buy decisions, e.g. Horngren, Datar and Rajan, Cost Accounting: A Managerial Emphasis (Pearson)
Learn the Concepts Behind This Tool
These BIZOMAT Library readings explain the method this tool uses, with worked examples.
Method explained here · BIZOMAT original book
Service, supply and end of life
In Connected Products by the Numbers
What it covers: Price a connected product with its cost to serve, compare service models under churn, decide what to make and buy, and plan for network closures, battery replacement and end of life.
Method explained here · Library collection
Make or buy: choosing between in-house manufacturing and outsourcing
In Manufacturing Operations and Design for Manufacture
What it covers: A practical framework for deciding whether to make parts in-house or outsource them: volume, utilisation, capability, cost, control, risk and how to protect your design.
BIZOMAT tools are screening and decision-support utilities. Verify important financial, engineering, safety, legal or operational decisions using appropriate professional standards and your organisation’s approved data.