BIZOMAT Tools · Decide
Make or Buy (detailed cost comparison)
Should you manufacture this internally or buy it from a supplier?
A detailed annual make-or-buy comparison that separates material, labour, variable overhead, freight and fixed costs, with a cost build-up table.
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 | Annual demand forecast for the part |
| Make material / unit | $/unit | Bill of materials cost per unit from the costing system |
| Make labour / unit | $/unit | Standard labour time × loaded labour rate |
| Make variable overhead / unit | $/unit | Variable overhead rate from finance (energy, consumables per unit) |
| Annual make fixed cost | $ | Annual fixed costs that would stop if you bought (avoidable fixed cost) |
| Supplier price / unit | $/unit | Supplier quotation at the forecast volume |
| Freight / landed cost / unit | $/unit | Freight, duty, packaging and inspection per unit (landed cost) |
| Annual supplier/setup cost | $ | Annual supplier set-up, tooling amortisation or account costs |
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
- The number of parts needed in a year, from the demand forecast. All annual costs and the per-unit comparison 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 variable cost per unit.
- Get it right
- Check the answer at your low and high forecasts too; a crossover near your volume makes the choice sensitive.
What this means: Make material / unit
- What it is
- The cost of raw material and bought-in components in one unit made in-house, from the bill of materials in your costing system.
- Units and format
- Enter a number in $/unit: money per unit. The form accepts $0/unit or more.
- Example
- The form opens with $5/unit as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- Adds to the make variable cost, multiplied by the annual quantity.
- Get it right
- Include scrap and offcut allowance; material that is wasted is still paid for.
What this means: Make labour / unit
- What it is
- The direct labour cost of making one unit: the standard time per unit multiplied by the loaded labour rate.
- Units and format
- Enter a number in $/unit: money per unit. The form accepts $0/unit or more.
- Example
- The form opens with $3/unit as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- Adds to the make variable cost, multiplied by the annual quantity.
- Get it right
- Use the loaded rate including on-costs, and convert minutes to hours before multiplying.
What this means: Make variable overhead / unit
- What it is
- Overhead that rises with each unit made in-house, such as machine energy, consumables and tooling wear, from finance’s variable overhead rate.
- Units and format
- Enter a number in $/unit: money per unit. The form accepts $0/unit or more.
- Example
- The form opens with $1.5/unit as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- Adds to the make variable cost, multiplied by the annual quantity.
- Get it right
- Leave out fixed overhead such as rent; it does not change with this decision unless it would stop.
What this means: Annual make fixed cost
- What it is
- The yearly fixed cost of making in-house that would stop if you bought instead, such as dedicated tooling, equipment lease or a dedicated operator.
- 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 $15000 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- Added once to the annual make cost; higher values raise the crossover volume.
- Get it right
- Include only avoidable fixed costs; shared overhead that continues either way is not relevant.
What this means: Supplier price / unit
- What it is
- The supplier’s quoted price for one unit at your annual volume, before freight and landed costs.
- Units and format
- Enter a number in $/unit: money per unit. The form accepts $0/unit or more.
- Example
- The form opens with $11/unit as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- Adds to the buy variable cost, multiplied by the annual quantity.
- Get it right
- Confirm the quote is for your volume and specification; price breaks change the comparison.
What this means: Freight / landed cost / unit
- What it is
- The extra cost per unit to get bought parts into your store: freight, duty, packaging, incoming inspection and handling.
- Units and format
- Enter a number in $/unit: money per unit. The form accepts $0/unit or more.
- Example
- The form opens with $0.75/unit as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- Adds to the buy variable cost, multiplied by the annual quantity.
- Get it right
- Spread lump-sum shipment costs over the units in each shipment to get a per-unit figure.
What this means: Annual supplier/setup cost
- What it is
- Yearly fixed costs of buying: supplier set-up charges, tooling amortisation, account fees or supplier management time.
- 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 $3000 as a worked example. It is an illustration, not a recommended value: replace it with your own figure.
- Effect on the result
- Added once to the annual buy cost; higher values lower the crossover volume.
- Get it right
- Spread one-off supplier tooling over the years it covers so this stays an annual figure.
Method and formulas
- Make variable = material + labour + variable overhead per unit
- Buy variable = supplier price + freight and landed cost per unit
- Annual cost = quantity × variable cost + annual fixed cost (each option)
- Crossover = (make fixed − supplier fixed) ÷ (buy variable − make variable)
Limitations
- Assumes costs are linear with volume
- Does not value strategic capability, IP or supply-chain risk
- Excludes inventory carrying cost differences unless included in landed cost
Typical uses
- Sourcing decisions for production parts
- Preparing a make-or-buy case for management
- Insourcing reviews when volumes grow
Who it is for
- Manufacturing engineers
- Cost accountants
- Supply chain and procurement managers
What you get
- MAKE or BUY with the annual difference
- Cost per unit of each option
- Annual cost build-up table
- Crossover volume
Interpreting the result
- Only avoidable fixed costs belong in the make option
- If the decision flips within your forecast range, gather better data before committing
- Check the sensitivity table for the input with the most leverage
References
- Horngren, Datar and Rajan, Cost Accounting: A Managerial Emphasis (Pearson), relevant costing chapter
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.