Make vs Buy Cost Comparison

How make vs buy cost comparisons work

A make vs buy analysis compares the cost of producing a unit internally with the cost of purchasing from a supplier. The decision often depends on volume, fixed costs, and quality. Internal production may have lower unit costs but requires fixed overhead and investment. Supplier costs may be higher per unit but avoid internal fixed expenses. This calculator shows both totals so you can compare options at a specified volume.

Internal unit cost is the sum of materials, labor, and overhead. The defect or rework rate increases this effective unit cost because you must produce more than one unit to deliver one usable unit. A 3% defect rate means you need 1.03 units of input for each usable unit, so the effective unit cost is increased by 3%. This adjustment is important because quality issues can erase apparent cost advantages.

Fixed costs create break-even points. If internal fixed costs are large, the supplier may be cheaper at low volumes, while internal production may become cheaper as volume grows. The break-even volume is calculated when internal and supplier totals are equal. If the supplier unit cost is already lower than internal cost, there may be no break-even point; the calculator will indicate that the supplier remains cheaper under the current assumptions.

The output includes total internal cost, total supplier cost, and an estimated break-even volume. These are planning metrics that help with sourcing decisions, capital budgeting, and contract negotiations. They do not capture strategic considerations such as IP risk, flexibility, lead time, or supplier reliability. For a complete decision, consider operational constraints alongside the cost analysis.

Use the calculator to run scenarios with different volumes or defect rates. A small change in quality or fixed overhead can shift the decision. Because the tool runs locally in your browser, you can use sensitive cost inputs without sharing them externally.

Formula

Internal unit cost: Materials + Labor + Overhead

Effective internal unit: Internal Unit × (1 + Defect %)

Internal total: Internal Fixed + Effective Unit × Volume

Supplier total: Supplier Fixed + Supplier Unit × Volume

Example calculation

If internal unit cost is $12 (materials 6 + labor 4 + overhead 2) with 3% defects, the effective unit is 12 × 1.03 = 12.36. With $5,000 fixed cost and volume 3,000, internal total is 5,000 + 12.36 × 3,000 = $42,080. Supplier cost at $12 per unit plus $1,500 fixed is 1,500 + 12 × 3,000 = $37,500, so the supplier is cheaper at this volume.

FAQs

Does this include logistics costs?

No. Use the Total Landed Cost Calculator to include freight and handling costs.

What if internal and supplier costs are equal?

The break-even volume indicates where costs intersect. Non-cost factors can guide the decision.

How should I estimate defects?

Use historical quality data or conservative estimates for new processes.

Can I compare multiple suppliers?

Run the calculator for each supplier scenario and compare totals and break-even points.

Is this calculator private?

Yes. All calculations run locally in your browser.

How it works

This calculator adjusts internal unit cost for defects, adds fixed fees, and compares totals to estimate a break-even volume. All computation is client-side for privacy.

Disclaimer

Cost comparisons do not capture strategic factors like IP, risk, or capacity constraints. Use this as a quantitative baseline, not a final decision.