Make or Buy? Compare Avoidable Costs and Released Capacity

This worksheet is for an owner considering outsourced preparation, components or production. Use a specific quantity and period, then confirm that the supplier's offer covers the same specification and delivery requirements.

Separate the unit cost into parts

Your full unit cost is useful for setting sustainable prices. A sourcing decision needs a second view: which costs change if production moves outside? ACCA's relevant-cost explanation identifies costs and revenue affected by the decision, excluding past spending and unchanged allocations.

The fictional business needs 1,000 components next month. The accounts show an in-house cost of $13 each. A supplier quotes $10 delivered, plus $500 to inspect the batch. Buying appears cheaper until the owner checks what would actually stop being paid.

Assumptions: Fictional Australian-dollar management example. Revenue and costs exclude any recoverable GST; non-recoverable tax is included in costs. No GST entitlement or income-tax deduction is assumed for your business. Contribution is before unallocated overhead and income tax.

Cost or capacity	Make internally	Buy in
Materials purchased	$5,000	$0
Labour that can genuinely be avoided	$4,000	$0
Variable production supplies	$1,000	$0
Supplier and inspection	$0	$10,500
Unchanged allocated overhead	$3,000	$3,000
Total modelled spending	$13,000	$13,500
Relevant difference	Baseline	Buy costs $500 more
Bottleneck hours released	0	100 hours

Original ASBG worked example. All businesses, amounts and scenarios are fictional. The table contains the same figures as the visual.

Only $10,000 of the internal cost disappears in this scenario. Paying $10,500 outside increases spending by $500. The $3,000 overhead remains with either option. Historical tooling already paid for is also outside the difference, although any future disposal proceeds or additional setup need their own line.

Put a realistic value on the freed time

Suppose confirmed extra work can use all 100 released hours and contributes $12 per hour after every additional delivery cost. The $1,200 added contribution more than offsets the $500 extra purchase cost, improving the modelled result by $700.

If only 20 hours can be sold, the added contribution is $240 and buying leaves the business $260 worse off. If there is no extra work, it still costs $500 more. Free time might have other benefits, but it isn't automatically $1,200 of profit. Use the bottleneck-hour comparison to establish what demand can really use that capacity.

Recheck the labour assumption

The $4,000 above is explicitly avoidable under the example's existing arrangements. If employees remain paid the same amount, buying saves only the $6,000 materials and supplies. It then adds $4,500 of spending before any benefit from redeploying staff. Check actual obligations and available work; this worksheet provides no employment-change advice.

Trial the supply before depending on it

Ask for the specification, accepted tolerances, inspection process, minimum order, lead time and arrangements for rejected items. Cost freight, storage and safety stock if they are not in the quote. Compare a small accepted trial batch with your normal output before a larger commitment.

Record the date each saving would start. Stock already ordered, notice periods or committed supply can delay savings. If you are considering ending the product altogether, use the keep-or-drop comparison rather than treating outsourcing and withdrawal as the same decision.

Where to get help

Take the supplier quote and internal cost breakdown to your accountant; have unfamiliar supply terms reviewed before agreeing. The pricing and profit guide links the related product-cost worksheets.