About the Make or Buy Analysis Calculator
This make or buy calculator compares producing a part, product or service yourself with buying it from an outside supplier, using the relevant-cost approach taught in managerial accounting. Only costs that change with the decision count: the variable cost of making each unit, the fixed costs you would actually eliminate if you stopped making it, and the opportunity cost of the capacity production ties up. Allocated overhead that continues either way is ignored.
Enter annual volume, the per-unit materials, labor and variable overhead, the fixed overhead currently allocated and how much of it is avoidable, the supplier’s price and any extra cost of buying such as freight, receiving and inspection. The calculator shows the total relevant cost of each option, which is cheaper and by how much, the highest price you could pay a supplier and still save money, and the volume at which the two options cost the same.
Use it for insourcing vs outsourcing decisions, component sourcing, co-packing, IT and service outsourcing or accounting coursework. The comparison is financial only: weigh quality control, supplier reliability, lead times and know-how alongside the numbers.
With the default inputs, the annual savings from the cheaper option is $9,000.00. Change any value above to recalculate instantly.
How to use the make or buy analysis calculator
- 1Enter how many units you need a year.
- 2Enter the per-unit materials, labor and variable overhead of making it yourself.
- 3Enter the fixed overhead allocated to the item and the share you would truly eliminate.
- 4Enter the supplier’s price and any extra cost per unit of buying.
- 5Add the opportunity cost of the capacity, then compare the relevant totals and break-even volume.
Formula and method
The relevant cost of making is the variable cost per unit — direct materials, direct labor and variable overhead — times annual quantity Q, plus only the fixed overhead that would disappear if you stopped making the item, plus the opportunity cost of the capacity (what the freed space, machines or people could earn otherwise). The cost of buying is the supplier price plus any extra per-unit costs of purchasing, times Q.
Unavoidable fixed overhead is incurred under both options, so it cancels out and is excluded. Setting the two totals equal gives the break-even (indifference) volume: below it buying is cheaper because the fixed costs of making are spread over too few units; above it making is cheaper, provided the supplier’s delivered price is higher than your variable cost.
- Q
- Units needed per year
- DM, DL, VOH
- Direct materials, direct labor and variable overhead per unit
- price + extra
- Supplier price plus freight, receiving and inspection per unit
- opportunity
- Profit forgone by using capacity to make the item
Worked examples
Component at 10,000 units — buy
Making costs $23 variable per unit × 10,000 = $230,000, plus $24,000 of avoidable fixed overhead (40% of $60,000) and $15,000 of opportunity cost, for $269,000. Buying at $25 plus $1 of freight costs $260,000, so outsourcing saves $9,000. The two options break even at (24,000 + 15,000) ÷ (26 − 23) = 13,000 units.
Same component at 20,000 units — make
Doubling volume spreads the $39,000 of avoidable fixed and opportunity costs over more units: making costs $460,000 + $39,000 = $499,000 against $520,000 to buy. Above the 13,000-unit break-even, making in-house saves $21,000.
Spare capacity, no avoidable overhead
The full cost of $20 per unit ($12 variable + $8 of allocated overhead) makes the $14.50 delivered supplier price look attractive. But none of the overhead would go away and the capacity is idle, so the relevant cost of making is just $12 × 5,000 = $60,000 against $72,500 to buy — making saves $12,500.
Frequently asked questions
What costs are relevant in a make or buy decision?+
Only costs that differ between the options: variable production costs, fixed costs that would be eliminated if you bought, the opportunity cost of the capacity used, and the full delivered cost of buying. Sunk costs and allocated overhead that continues either way are irrelevant.
Why shouldn’t I use the full cost per unit?+
Full absorption cost includes allocated fixed overhead such as rent and management that will still be paid if you outsource. Comparing that full cost with a supplier price overstates the savings from buying and can lead to outsourcing decisions that reduce profit.
What is opportunity cost in make or buy analysis?+
It is the profit you give up by using space, equipment or staff to make the item instead of something else. If buying would free a production line that could make another product earning $15,000 of contribution, that $15,000 is added to the cost of making.
What non-financial factors matter in make vs buy?+
Quality control, supplier reliability and lead time, protecting proprietary know-how, flexibility to change volumes, the risk of supplier price increases, and whether the activity is a core competence. A small cost saving may not justify losing control of a critical component.
What is the break-even volume in make or buy?+
It is the annual quantity at which the relevant cost of making equals the cost of buying: avoidable fixed and opportunity costs divided by the difference between the supplier’s delivered price and your variable cost. Below it, buying is cheaper; above it, making is cheaper.
Results are estimates for educational purposes and are not financial advice. Rates, fees and terms vary — confirm with your lender or a licensed advisor before making decisions.