Make-or-Buy Break-Even Calculator
Enter the costs that differ between making in-house and buying from a supplier. The calculator compares total relevant cost, effective unit cost, and the annual volume where the choice changes.
Lower-cost optionBuy from supplier
- Total relevant cost to make
- $370,000.00
- Total relevant cost to buy
- $325,000.00
- Savings from lower-cost option
- $45,000.00
- Break-even annual volume
- 13,750
- Effective make cost per unit
- $12.33
- Effective buy cost per unit
- $10.83
- Freed-capacity benefit over horizon
- $60,000.00
Relevant cost breakdown
| Cost component | Make | Buy |
|---|---|---|
| Unit costs over horizon | $240,000.00 | $360,000.00 |
| Recurring fixed costs | $90,000.00 | $15,000.00 |
| One-time costs | $40,000.00 | $10,000.00 |
| Freed-capacity benefit | $0.00 | -$60,000.00 |
| Total relevant cost | $370,000.00 | $325,000.00 |
Includes only costs that change between making and buying; unavoidable overhead and sunk costs should stay out of the inputs.
The freed-capacity benefit is larger than the recurring buy fixed cost, so verify that the benefit is realistically obtainable.
How to use this calculator
- Enter the expected annual quantity and the number of years to analyze.
- Add only the make costs that would be incurred or avoided because of this decision.
- Enter the supplier price, landed cost, recurring buy cost, and one-time transition cost.
- Count freed capacity only when it can realistically produce contribution or rental income.
- Compare the total cost, break-even volume, and notes before treating the lower-cost option as a recommendation.
How the make-or-buy break-even is calculated
A make-or-buy decision should compare relevant costs: costs that change depending on whether the work stays in-house or moves to a supplier. This calculator includes variable unit costs, avoidable fixed costs, one-time setup or transition costs, and a benefit for capacity that can actually be redeployed if the item is purchased.
The total cost formulas are:
TotalMake = Y × (Q × M + FM) + SM
TotalBuy = Y × (Q × (P + L) + FB - G) + SB
- Q is annual quantity.
- Y is the analysis horizon in years.
- M is the relevant make cost per unit.
- FM is the annual avoidable fixed cost of making.
- SM is the one-time make cost.
- P is the supplier price per unit and L is additional landed cost per unit.
- FB is recurring buy fixed cost, SB is one-time buy transition cost, and G is realizable freed-capacity benefit.
The lower total cost at the entered volume becomes the lower-cost option. Savings are the absolute difference between the two totals. Effective unit costs divide each total by all units in the horizon, but the calculator omits those rows when annual quantity is zero because there are no units to divide by.
Break-even annual volume
The crossover volume solves the same equation for Q:
Q* = [Y × (FM - FB + G) + SM - SB] ÷ [Y × ((P + L) - M)]
A finite, nonnegative result means the make and buy totals are equal at that annual volume. If the result falls between whole units, the notes show which option becomes cheaper at the next whole-unit volume. If the supplier's full unit cost equals the make unit cost, there is no single crossover unless the fixed and one-time costs also tie; in that case every volume ties.
What moves the decision most
The unit-cost gap dominates at high volumes. A small per-unit supplier premium can outweigh fixed-cost savings when demand is large, while a supplier unit-cost advantage can make buying attractive even after transition costs. At low volumes, avoidable fixed cost, one-time setup, supplier qualification, and capacity redeployment often matter more than the unit price.
What this calculator leaves out
The model assumes constant unit costs and the same annual volume in every year of the horizon. It does not model supplier price tiers, capacity steps, inflation, financing, taxes, working-capital timing, or the timing of cash flows.
Do not enter unavoidable overhead or sunk equipment costs. Allocated overhead often stays with the business either way, and sunk tooling is not relevant unless a new outlay or avoidable disposal cost is part of the decision. Quality risk, delivery reliability, intellectual-property exposure, workforce effects, switching cost, and supplier resilience need a separate qualitative review.
Worked example
Suppose demand is 10,000 units per year and the horizon is three years. Making costs $8 per unit, has $30,000 of avoidable fixed cost per year, and requires $40,000 of one-time tooling. Buying costs $11 from the supplier plus $1 of landed cost per unit, adds $5,000 of recurring supplier-management cost per year, requires a $10,000 transition cost, and frees capacity worth $20,000 per year.
The make total is 3 × (10,000 × $8 + $30,000) + $40,000 = $370,000. The buy total is 3 × (10,000 × ($11 + $1) + $5,000 - $20,000) + $10,000 = $325,000. Buying is lower by $45,000, with an effective cost of $10.83 per unit versus $12.33 for making.
The break-even annual volume is [3 × ($30,000 - $5,000 + $20,000) + $40,000 - $10,000] ÷ [3 × (($11 + $1) - $8)] = 13,750 units per year. Above that volume, making becomes cheaper because the supplier's full unit cost is higher.
Common questions
Which costs are relevant in a make-or-buy decision?
Relevant costs are the future costs and benefits that differ between making and buying. Include direct materials, direct labor, variable overhead, avoidable supervision or lease costs, supplier price, landed cost, transition cost, and any capacity benefit that can actually be earned. Exclude costs that remain the same under both choices.
Why is allocated fixed overhead usually excluded?
Allocated overhead is often a bookkeeping assignment rather than a cost that disappears when production moves outside. If the rent, depreciation, management salary, or shared service cost will remain after buying, it is not avoidable and should not be counted as make savings. Include only the portion that will truly be eliminated.
How do I calculate make-or-buy break-even quantity?
Set total make cost equal to total buy cost and solve for annual quantity. In this calculator the formula is Q* = [Y × (FM - FB + G) + SM - SB] ÷ [Y × ((P + L) - M)]. A negative result means the crossover is outside the useful positive-volume range.
How should freight, inspection, defects, and duty be included?
Put per-unit purchase additions in the additional buy cost field. That can include freight, duty, receiving, inspection, contract administration per unit, expected defect losses, and quality charges. Keep annual supplier-management costs in the recurring buy fixed cost field instead.
When should freed production capacity count as a benefit?
Count freed capacity only when the space, labor, machine time, or equipment can realistically earn contribution elsewhere or be rented out. If capacity would sit idle, the benefit is zero even though buying makes the operation less busy. The amount should be annual contribution after the costs needed to earn it.
Do supplier volume discounts or capacity steps change the analysis?
Yes. This calculator assumes one supplier unit price, one make unit cost, and annual fixed costs that do not step within the relevant range. Volume discounts, overtime, new equipment thresholds, minimum order quantities, and capacity additions create ranges that should be modeled separately.