Make vs Buy Analysis

Purpose

The Make vs Buy Analysis calculator compares the cost of producing a product or service internally with the cost of purchasing it from an external supplier.

It provides both:

• Full Cost Comparison — compares the total costs of the two alternatives.
• Relevant Cost Comparison — focuses only on costs that change as a result of the make-or-buy decision.

The calculator also estimates the break-even quantity at which the relevant costs of making and buying are equal.

Inputs

Annual Quantity

The number of units required during the analysis period, normally one year.

Make Fixed Cost

The total fixed cost associated with producing the item internally.

Make Unavoidable Fixed Cost

The portion of the internal fixed cost that will continue even if production is stopped and the item is purchased.

This cost is excluded from the relevant-cost decision because it does not change as a result of choosing to make or buy.

Make Variable Cost

The variable cost of producing one unit internally.

Buy Fixed Cost

Any fixed cost associated with purchasing externally, such as supplier setup or other fixed purchasing costs.

Buy Unavoidable Fixed Cost

The portion of the buy-side fixed cost that would continue regardless of the make-or-buy decision.

It is excluded from relevant cost because it does not change as a result of the decision.

Buy Unit Cost

The supplier's purchase cost per unit.

Results

Full Cost Comparison

This table compares the complete costs of the two alternatives.

It includes:

• Fixed Cost
• Variable Cost
• Total Cost
• Effective Unit Cost

The Buy − Make column shows the difference between the two alternatives.

A positive difference means buying costs more than making. A negative difference means buying costs less than making.

Relevant Cost Comparison

This is the more important comparison when making a short-term make-or-buy decision.

Unavoidable fixed costs are removed because they do not change when the decision changes.

The table includes:

• Relevant Fixed Cost
• Variable Cost
• Relevant Cost
• Effective Unit Cost

Break-Even Quantity

The break-even quantity is the production volume at which the relevant cost of making equals the relevant cost of buying.

The result should be interpreted together with the cost structure rather than as an unconditional recommendation.

Cost Savings

This shows the absolute difference between the relevant make and buy costs at the selected annual quantity.

Preferred Option

The calculator identifies the option with the lower relevant cost at the selected quantity:

• Make
• Buy
• Indifferent

The recommendation is based on relevant cost rather than full accounting cost.

Relevant Cost Concept

A cost is relevant to a decision when it changes depending on which alternative is selected.

For example:

• Make fixed cost: USD 50,000
• Unavoidable make fixed cost: USD 20,000
• Relevant make fixed cost: USD 30,000

The USD 20,000 unavoidable cost should not influence the make-or-buy decision because it will be incurred either way.

This prevents unavoidable costs from distorting the decision.

How the Calculation Works

Full Make Cost

Make Cost = Make Fixed Cost + (Make Variable Cost per Unit × Quantity)

Full Buy Cost

Buy Cost = Buy Fixed Cost + (Buy Unit Cost × Quantity)

Relevant Make Fixed Cost

Relevant Make Fixed Cost = Make Fixed Cost − Make Unavoidable Fixed Cost

Relevant Buy Fixed Cost

Relevant Buy Fixed Cost = Buy Fixed Cost − Buy Unavoidable Fixed Cost

Relevant Make Cost

Relevant Make Cost = Relevant Make Fixed Cost + (Make Variable Cost per Unit × Quantity)

Relevant Buy Cost

Relevant Buy Cost = Relevant Buy Fixed Cost + (Buy Unit Cost × Quantity)

Break-Even Quantity

Break-Even Quantity = (Relevant Buy Fixed Cost − Relevant Make Fixed Cost) ÷ (Make Variable Cost per Unit − Buy Unit Cost)

Example

Suppose a company requires 10,000 units per year.

Make

• Fixed cost: USD 50,000
• Unavoidable fixed cost: USD 20,000
• Variable cost: USD 12 per unit

Buy

• Fixed cost: USD 5,000
• Unavoidable fixed cost: USD 0
• Supplier price: USD 18 per unit

The full costs are:

Make

USD 50,000 + (10,000 × USD 12) = USD 170,000

Buy

USD 5,000 + (10,000 × USD 18) = USD 185,000

The full-cost comparison favors making by USD 15,000.

However, the relevant make fixed cost is:

USD 50,000 − USD 20,000 = USD 30,000

Therefore:

Relevant Make Cost

USD 30,000 + USD 120,000 = USD 150,000

Relevant Buy Cost

USD 5,000 + USD 180,000 = USD 185,000

The relevant-cost analysis therefore shows that making saves USD 35,000 at 10,000 units.

The break-even quantity is approximately 4,167 units.

Interpreting the Result

Use Full Cost Comparison when you want to understand the overall cost structure of the two alternatives.

Use Relevant Cost Comparison when the question is:

What costs will actually change if we switch from making to buying, or from buying to making?

The relevant-cost result is generally the more useful basis for a decision when some fixed costs are unavoidable.

A lower relevant cost means the alternative requires fewer incremental resources under the assumptions entered.

Important Considerations

The calculator uses the costs supplied by the user and does not determine which costs are unavoidable. Carefully identify costs that would genuinely disappear or arise if the decision changes.

Other factors may also matter in a real make-or-buy decision, including:

• Quality
• Supplier reliability
• Lead time
• Capacity constraints
• Available production capacity
• Strategic supplier relationships
• Intellectual property
• Flexibility
• Product availability
• Long-term price changes

These factors are not included in the numerical comparison.

The calculation assumes that the stated unit costs and fixed costs are appropriate for the selected quantity.