What is a make-or-buy analysis?
A make-or-buy analysis compares in-house production with purchasing an equivalent product or service from an external supplier. The financial analysis should use relevant future costs that differ between the alternatives.
Fixed and variable costs
Making often has higher fixed costs for equipment, facilities, management and expertise but a lower variable unit cost. Buying often has lower fixed costs but a higher unit price.
Example
Making costs 500,000 per year plus 60 per unit. Buying costs 50,000 per year plus 100 per unit. Break-even is 11,250 units. Below that volume buying costs less; above it making costs less.
More than a cost decision
Also assess capacity, quality capability, lead time, intellectual property, supply risk, flexibility and strategic expertise. Test how volume and price changes affect the conclusion.
Calculate your own scenario
Use the free PurchaseKPI calculator and get the result immediately.
Make-or-buy calculator