Make-or-Buy Decision Calculator

How make vs buy cost comparisons work

A make-or-buy analysis compares the total cost of producing usable units in-house with the total cost of buying those units from a supplier. The outsourcing decision usually depends on volume, fixed costs, supplier landed cost, and quality yield. Internal production may have lower variable cost but require equipment, tooling, maintenance, and monitoring. Buying may avoid those fixed costs but add freight, taxes, import fees, ordering costs, and supplier contract charges.

The calculator treats the entered volume as usable units required. Scrap is modeled with yield: a 3% scrap rate means the process yield is 97%, so production unit cost is divided by 0.97. That gives a cost multiplier of about 1.0309, not exactly 1.03. If defects are reworked instead of fully scrapped, add a separate rework cost per defective unit.

Fixed costs create break-even points. If internal fixed costs are high, buying can be cheaper at low volume. If the effective internal unit cost is lower than the supplier unit cost, making can become cheaper as volume rises. The sensitivity table shows how the decision changes at 50%, 75%, 100%, 125%, and 150% of your current forecast, plus the break-even point when it exists.

The output recommends the lower-cost option at the current volume, shows total savings, savings percentage, cost per usable unit for each option, and whether the volume is below or above break-even. These are planning metrics for sourcing, capital budgeting, and contract negotiation. A final decision should still account for operational and strategic factors.

Formulas and assumptions

Let Q be usable volume, IF be total internal fixed cost, SF be total supplier fixed cost, IU be base internal unit cost, d be scrap rate as a decimal, RW be rework cost per defective unit, and SU be supplier unit cost.

Base internal unit cost: IU = materials + labor + overhead + maintenance + storage + waste + monitoring

Effective internal unit cost: EIU = IU / (1 - d) + (d / (1 - d) x RW)

Supplier unit cost: SU = supplier price x (1 + sales tax %) + shipping + import fees + inventory holding

Make total: IF + EIU x Q

Buy total: SF + SU x Q

Break-even volume: (SF - IF) / (EIU - SU)

If the break-even volume is positive, the lower-cost option changes at that volume. If it is zero, negative, or undefined, there is no practical positive break-even under the current assumptions. In those cases, one option is cheaper across all positive volumes, or the two options have equal unit costs and fixed costs decide the result.

Worked scenarios

Buying is cheaper at low volume

Inputs: internal base unit cost is $10, scrap is 2%, rework is $0, internal fixed cost is $18,000, supplier unit cost is $14, supplier fixed cost is $1,000, and volume is 3,000 usable units. Effective internal unit cost is 10 / (1 - 0.02) = $10.20. Make total is 18,000 + 10.20 x 3,000 = $48,612.24. Buy total is 1,000 + 14 x 3,000 = $43,000. Buying is cheaper by $5,612.24 because the internal fixed cost has not been spread across enough volume.

Making becomes cheaper at high volume

Using the same costs at 8,000 usable units, make total is 18,000 + 10.20 x 8,000 = $99,632.65. Buy total is 1,000 + 14 x 8,000 = $113,000. Making is cheaper by $13,367.35. The break-even volume is (1,000 - 18,000) / (10.20 - 14) = 4,478 units, so volumes above that point favor making under these assumptions.

FAQs

What costs should be included in a make-or-buy analysis?

Include internal materials, labor, overhead, equipment or depreciation, maintenance, setup or tooling, storage, waste disposal, monitoring, scrap, rework, and fixed costs. For buying, include supplier unit price, shipping, import fees, sales tax, ordering costs, inventory holding, contract fees, and other supplier fixed charges.

What is the make-or-buy formula?

Internal total equals internal fixed cost plus effective internal unit cost multiplied by volume. Supplier total equals supplier fixed cost plus supplier unit cost multiplied by volume. Choose the lower total after checking non-cost factors.

How do you calculate break-even quantity?

Break-even volume equals supplier fixed cost minus internal fixed cost divided by effective internal unit cost minus supplier unit cost. Positive break-even volume means the lower-cost option changes at that volume.

How should supplier shipping, taxes, and import fees be treated?

Add per-unit freight, import, handling, and inventory holding costs to the supplier unit cost. Apply sales tax to the supplier price before comparing totals when tax is relevant to the purchase.

How do defects affect usable unit cost?

For scrap, divide internal production unit cost by one minus the defect rate. Add a separate rework cost per defective unit if defective units can be reworked instead of fully scrapped.

What does no break-even mean?

No break-even means the two cost lines do not cross at a positive volume under the current assumptions. One option may be cheaper across all positive volumes, or the crossing may occur at a non-usable negative volume.

What qualitative factors matter in a make-or-buy decision?

Review capacity, quality control, supplier reliability, intellectual property protection, lead time, flexibility, strategic importance, and demand uncertainty before making the final decision.

Is this calculator private?

Yes. All calculations run locally in your browser, and the currency symbol is only a display setting.

Make-or-buy decision checklist

Disclaimer

Cost comparisons do not capture every strategic factor, supplier risk, capacity constraint, or contract term. Use this calculator as a quantitative baseline, not a final decision by itself.