🎓 Lesson 13
D5
Make-or-Buy Breakeven Calculator Lab
A make-or-buy breakeven calculator tells you the production volume at which it costs the same to manufacture something yourself as it does to buy it from a supplier.
🎯 Learning Objectives
- ✓ Calculate the make-or-buy breakeven quantity given fixed costs, variable unit costs, and supplier unit price
- ✓ Analyze how changes in equipment utilization rate or labor productivity affect breakeven volume
- ✓ Design a sensitivity table showing breakeven shifts across ±20% variations in key cost drivers
- ✓ Explain the impact of sunk costs, opportunity costs, and capacity constraints on breakeven interpretation
📖 Why This Matters
In modern mining operations, decisions like whether to run an in-house explosive mixing plant or contract with a licensed supplier can swing annual costs by millions—and affect safety, scheduling, and regulatory compliance. A single misjudged breakeven point may lead to underutilized capital equipment or hidden cost overruns from fragmented vendor management. This lab builds your ability to quantify that tipping point using real cost data from operating mines.
📘 Core Principles
The make-or-buy decision rests on cost structure comparison: internal production incurs fixed costs (e.g., plant CAPEX amortization, certified personnel salaries) and variable costs (e.g., raw explosive materials, energy per tonne), while procurement incurs only variable cost (supplier’s delivered unit price). Breakeven occurs where TC_make = TC_buy. Critical nuances include distinguishing avoidable vs. unavoidable fixed costs, incorporating downtime penalties for in-house bottlenecks, and recognizing that 'buy' may carry hidden transaction costs (e.g., logistics coordination, quality inspection labor). In blasting engineering, this applies directly to decisions on site-mixed emulsions vs. pre-packaged ANFO, or in-house drill bit refurbishment vs. OEM replacement.
📐 Make-or-Buy Breakeven Quantity
This formula identifies the minimum annual production volume needed to justify internal manufacturing. It assumes linear cost behavior and constant pricing—valid for stable operational conditions over 12–24 months. Use it before committing CAPEX or signing multi-year supply contracts.
Breakeven Quantity (Q*)
Q* = FC / (P − VC)Minimum annual units required for internal production cost to equal external procurement cost.
Variables:
| Symbol | Name | Unit | Description |
|---|---|---|---|
| Q* | Breakeven quantity | units/year | Annual production volume where total make cost equals total buy cost |
| FC | Avoidable fixed cost | USD/year | Fixed costs eliminated if 'buy' is selected (e.g., dedicated equipment lease, certified staff salary) |
| P | Supplier unit price | USD/unit | All-in delivered cost per unit from external vendor, including logistics and acceptance testing |
| VC | Internal variable cost per unit | USD/unit | Marginal cost to produce one additional unit internally (materials, direct labor, energy, consumables) |
Typical Ranges:
On-site emulsion blending (large open pit): 5,000 – 15,000 t/yr
Drill bit regrinding shop (underground mine): 8,000 – 22,000 bits/yr
Haul truck tire retreading (40+ fleet): 1,500 – 3,200 retreads/yr
💡 Worked Example
Problem: A copper mine considers building an on-site emulsion blending plant. Estimated annual fixed cost = $1.2M (includes permits, automation, and certified blaster salary). Variable cost per tonne of blended emulsion = $320. Current supplier quote = $495/tonne delivered to borehole. What is Q*?
1.
Step 1: Identify parameters — FC = $1,200,000; VC = $320/tonne; P = $495/tonne
2.
Step 2: Apply Q* = FC / (P − VC) = 1,200,000 / (495 − 320) = 1,200,000 / 175
3.
Step 3: Compute: 1,200,000 ÷ 175 = 6,857.14 tonnes/year. Round up to 6,858 tonnes.
4.
Step 4: Verify against typical range: Large open-pit mines use 5,000–15,000 tonnes/year of emulsion — so breakeven is achievable within one year of operation.
Answer:
The breakeven quantity is 6,858 tonnes/year, falling within the typical annual emulsion consumption range for mid-sized open-pit operations (5,000–15,000 t/yr).
🏗️ Real-World Application
At Newmont’s Boddington Mine (Western Australia), engineers evaluated in-house ANFO bagging vs. third-party delivery. Fixed cost for modular bagging unit: $840,000 (3-yr amortization); VC = $182/t (prill, fuel oil, labor, calibration). Supplier price: $268/t FOB mine gate. Breakeven: 840,000 / (268 − 182) = 9,767 t/yr. Since Boddington consumed ~11,200 t/yr of ANFO, the project was approved — delivering $1.1M/yr net savings and reducing delivery lead time from 72 to 4 hrs. Post-implementation audit confirmed 92% equipment uptime and <0.8% density variance — meeting ISEE Blasting Standards Section 4.2.
✏️ Your Turn: Haul Truck Tire Retreading Decision
A contractor operates 42 rigid-frame haul trucks. Each requires 6 retreads/year (24/7 operation). In-house retread facility would cost $2.1M CAPEX (5-yr straight-line depreciation), $410,000/yr labor & utilities, and $132/retread material & consumables. Vendor quote: $295/retread, including mounting/balancing. Assume no salvage value and full capacity utilization. Calculate Q*, then determine if in-house is justified given current fleet demand. Bonus: What minimum utilization rate (%) makes in-house viable if demand drops 15% next year?