Deep-dive guide
Subcontract Versus Buying Your Own Machine: Utilisation, Operator and Loan Simulator
Executive industry analysis
Subcontracting turns a fixed cost into a variable one. You pay a price per finished unit, nothing when you need none, and the subcontractor carries the machine, the operator and the idle time. Buying your own machine reverses this: the cost per unit falls when the machine is busy, but the loan, the operator and the maintenance continue whether or not there is work. The decision is not about which option is cheaper on a good day. It is about how often the machine will be full enough to beat the price you pay now.
Utilisation is the hinge. A machine that is 80 percent used spreads its fixed costs over many units and can undercut a subcontractor by a large margin. At 30 percent utilisation, the same machine's cost per unit may be higher than the outside price, and nothing in the price list warns you. Many purchases are justified with a peak month, a full order book or a supplier's brochure rate, and then run at half that load. The number to check is the volume you can keep on the machine in an ordinary month.
The domino model follows the logic in order. Volume sets utilisation, utilisation sets the own cost per unit, the gap between that cost and the subcontract price is the advantage per unit, the contribution that advantage creates must cover the fixed costs, and what remains is the monthly saving. A weak link early, such as low volume, flips every stage downstream, so a plan that looks fine on paper can lose money in practice.
The iceberg separates the numbers on the quote from the full cost of owning. Above the waterline sit the material and energy, the operator and the loan principal. Below it sit the interest, maintenance and spare parts, the units lost to start-up and rejects, and the time and tooling spent on changeovers. These costs are real but are rarely in the supplier's payback calculation. Use the simulator to find the volume below which subcontracting wins.
Formula and methodology blueprint
The model compares owning the machine with subcontracting for one month. The machine can make up to 6,000 units a month, and any demand above that stays with the subcontractor at the same price, so the saving is earned only on the units made in house. Each unit made avoids the subcontract price and costs variable cost plus 3 percent scrap and a small changeover charge. Fixed costs are the loan payment over five years, maintenance of 3 percent of the machine price a year and the operator.
- Utilisation
- U = min(demand, 6000) ÷ 6000
- The share of the machine's monthly capacity that is used.
- Monthly fixed cost
- F = loan payment + maintenance + operator
- The costs that continue whether the machine runs or not.
- Own cost per unit
- C = (v × 1.03 + 0.08) + F ÷ units
- Variable cost with scrap and setup, plus fixed cost spread over the units made.
- Advantage per unit
- D = subcontract price − C
- Positive means making it yourself is cheaper at this volume.
- Monthly saving
- Net = units × (price − v × 1.03 − 0.08) − F
- The result versus subcontracting every unit; the breaking point is where it reaches zero.
- Break-even volume
- units* = F ÷ (price − v × 1.03 − 0.08)
- The volume at which owning and subcontracting cost the same.
Cascading elasticity
The gap between the subcontract price and the unit variable cost is the margin per unit, so a small change in price moves the saving across all units. Volume is the next most elastic input because it spreads the fixed costs. Machine price and the loan rate act together on the payment, which is the largest fixed line, while operator cost acts as a flat monthly threshold.
Three real-world case studies
Bootstrapped starter
A workshop with steady but modest demand
A small workshop needs three thousand units a month, gets a decent subcontract price and buys a mid-priced machine with one part-time operator. Utilisation is about half, yet the saving per unit is enough to cover the fixed cost. Loading it shows how a moderate volume can justify a machine when the price gap is large.
Scaling mid-market
A growing line near full capacity
A growing manufacturer needs seven thousand units a month, so the machine runs at full capacity and the remainder stays outside. The fixed costs are high but spread across every unit the machine can make. Loading it shows how a full machine turns a big purchase into a strong monthly saving.
Black-swan crisis
A machine bought for a volume that never came
A buyer purchases an expensive machine and takes a high-interest loan expecting large orders, but demand stays below two thousand units and the subcontract price falls after a competitor cuts. The operator and the loan keep running. Loading it shows how the saving flips into a monthly loss.
Industry benchmark matrix
| Metric | Danger zone | Industry average | Top 10% elite |
|---|---|---|---|
| Machine utilisation on planned shifts | Below 40% | 55–75% | Above 85% |
| Own cost per unit versus subcontract price | Above 100% | 70–90% | Below 65% |
| Payback of the machine | Over 4 years | 2–3 years | Under 18 months |
| Fixed costs as share of total own cost | Above 70% | 40–55% | Below 30% |
| Scrap on start-up and changeover | Above 6% | 2–4% | Below 1.5% |
Variables and levers
Units needed per month
Monthly volume of this operation; the machine makes up to 6,000 units a month and any overflow stays with the subcontractor.
Lever: Pool volume from other products or customers onto the machine, because the fixed costs are the same whether it runs half or fully.
Subcontract price per unit
What the subcontractor charges for each finished unit, delivered, which is the cost you avoid by making it yourself.
Lever: Get a second quote and a volume-based price before you decide, since the subcontract price is the benchmark everything is compared with.
Own variable cost per unit
Material, energy, tooling and consumables for each unit made in house, before scrap and changeover.
Lever: Measure real material and energy per unit on a trial run, and check whether a cheaper tool or settings can lower it.
Machine price installed
Purchase price including delivery, installation, foundations and commissioning, financed over five years.
Lever: Compare new, refurbished and leased machines, and negotiate installation and training into the price.
Operator cost per month
Fully loaded monthly cost of the person or share of a person needed to run and feed the machine.
Lever: Plan shifts so one operator also covers a second step, or automate loading, since labour is a fixed monthly cost.
Loan interest rate
Yearly interest on the five-year loan or lease that finances the machine.
Lever: Compare bank loans, leasing and supplier credit, because a few points of interest on a five-year loan add up quickly.
How to use this simulator
- 1Enter the monthly volume you can keep on the machine in an ordinary month, not a peak.
- 2Add the subcontract price and your own variable cost per unit from a trial run or supplier data.
- 3Enter the installed machine price, operator cost and loan rate.
- 4Read the five domino boxes and press Find my breaking point to see the break-even volume.
- 5Compare with the used-machine plan over 24 months in the Parallel universe tab.
Mistakes to avoid
- Justifying the machine with a peak month. The average month decides whether the fixed costs are covered.
- Comparing the subcontract price only with material and energy. Interest, maintenance, scrap and the operator belong in the own cost.
- Ignoring the chance that the subcontract price falls. A competitor or a negotiation can erase the advantage.
- Forgetting capacity. Above the machine's limit you still pay the outside price, so growth does not add saving.
Frequently asked questions
When does buying beat subcontracting?
When the volume you can reliably keep on the machine makes own cost per unit lower than the outside price. The break-even volume in the methodology section shows the threshold for your inputs.
Why does the operator count even when the machine is idle?
Because wages are paid monthly. If the operator can do other useful work when the machine is idle, reduce this cost to the share actually attributable to it.
What if demand is above the machine's capacity?
The model keeps the overflow with the subcontractor at the same price, so extra demand adds no saving beyond capacity. A second machine would need its own analysis.
Are there risks that the model does not include?
Yes. Quality, lead time, supplier dependence, intellectual property and flexibility matter beyond price. Include them in your decision alongside the numbers.
How do I find the break-even volume?
Press Find my breaking point. The tool moves each input towards its worse end and reports the value at which the monthly result reaches zero, ranked by how close each lever is.
How accurate is this?
It is an educational model with simplified costs, not financial or engineering advice. Replace the inputs with real quotes, check tax and depreciation rules in your country, and test your assumptions with a trial run.
This is an educational planning model with stated assumptions. It is not financial, tax or legal advice. Replace the inputs with your own figures and verify important decisions with a qualified professional.