School of Engineering · Playlist

Manufacturing Economics

Cost and volume, material utilization, make-or-buy decisions, and design for manufacturing.

  1. Manufacturing Cost and Volume
  2. Material Utilization and Cost
  3. Outsourcing
  4. Design for Manufacturing
Materials and Manufacturing Processes/Foundations

Manufacturing Cost and Volume

Estimate unit cost and find where two production methods cost the same.

Count material, processing, quality and overhead costs once

Count material, processing, quality and overhead costs once

Material, labor, machine time, tooling and scrap all affect the cost of an acceptable part. Setup prepares an operation; cycle time is the time for a repeating operation.

  • Material: stock purchase, delivery and material lost during production.
  • Processing: labor, machine time, tools, consumables and energy.
  • Quality: prevention, inspection, rework, rejects and returns.
  • Overhead: shared support such as facilities and indirect labor.

Check what a machine rate already includes before adding labor, energy or depreciation. Scrap belongs in the estimate once, even if it appears under both material and quality headings.

Spread fixed cost over the quantity actually needed; Practice

Spread fixed cost over the quantity actually needed

For a simple batch model, C = F + vQ and u = C/Q = F/Q + v. C is total cost, F is fixed batch cost, v is variable cost per part, Q is the number of acceptable parts, and u is average unit cost. Use Q greater than zero.

Fixed cost stays constant within the stated production range; variable cost grows with quantity. Setup and dedicated tooling may be fixed for a batch. Material and processing per part often contribute to v. State the period and cost boundary before classifying a cost.

Illustrative process A costs $120 + $8Q. At 60 parts, total cost is $600 and unit cost is $10.00/part. Producing unwanted parts to spread fixed cost creates inventory; it does not create demand.

Supporting detail: Addendum 1 — Why a shorter cycle does not reduce every cost equally.

Practice unit cost

Set total costs equal to find process break-even; Practice

Set total costs equal to find process break-even

Compare routes that meet the same requirements at the same quantity. From F_A + v_A Q = F_B + v_B Q, obtain Q* = (F_B − F_A)/(v_A − v_B).

Let A cost $120 + $8Q and B cost $720 + $3Q. Then Q* = ($720 − $120)/($8 − $3) = 120 parts. Both cost $1,080 total or $9/part. A costs less below 120; B costs less above 120.

Unit cost curves cross at 120 parts and 9 dollars per part. A costs less below the crossing and B above it.

Supporting detail: Addendum 2 — When there is no positive crossing.

Practice break-even

Move the volume slider and predict which process wins; Interactive

Move the volume slider and predict which process wins

Start with the original A/B costs and predict the cheaper process at 60 and 240 parts. Then change a setup cost or variable cost and compare at the same demanded quantity. The case selector also includes fractional crossings, parallel lines, an everywhere tie, and a crossing beyond the chart.

Process-cost explorer. Compare C = F + vQ and u = F/Q + v for two routes supplying the same demanded quantity of equivalent acceptable parts in one batch. Use the same included costs and period for each route, count each cost once, and assume the entered rates stay constant. The exercise does not establish equivalent quality, capacity or demand, or recommend a purchase.

Predict, calculate total cost for each route, then divide by the demanded quantity. With A = $120 + $8Q and B = $720 + $3Q:

Original comparison at three demanded quantities
PartsA total / per partB total / per partLower cost
60$600 / $10.00$900 / $15.00A
120$1,080 / $9.00$1,080 / $9.00Equal
240$2,040 / $8.50$1,440 / $6.00B

Between whole parts: let A = $90 + $6Q and B = $245 + $2Q. Q* = 155/4 = 38.75 parts. At 38 parts A totals $318 and B $321; at 39 parts A totals $324 and B $323. No whole-part quantity ties.

Try the other cases: A = $60 + $4Q and B = $210 + $4Q never cross because their slopes match; A stays $150 lower. If both F and v match, costs tie at every positive quantity. With A = $80 + $2Q and B = $200 + $5Q, A is lower for every positive Q. With A = $100 + $2.50Q and B = $900 + $2Q, the positive crossing is at 1,600 parts, beyond the live graph's 0–300 interval.

The editable explorer accepts fixed cost $0–$100,000, variable cost $0–$1,000/part and whole demand 1–10,000. Dollar entries have at most two decimal places; exact cent totals determine equality. Displayed average unit costs are approximate. A graph ending before a crossing does not prove there is no crossing. Zero on a total-cost graph shows fixed cost; unit cost at zero parts is undefined.

Static comparison: at 60 parts A is $10.00/part and B is $15.00/part; at 240 parts A is $8.50/part and B is $6.00/part. Use Dimensional Analysis to check units and Outsourcing to consider more than cost.

Materials and Manufacturing Processes/Foundations

Material Utilization and Cost

Check a stock layout, account for cutting loss and roll up material costs.

Prove the parts fit before dividing areas; Practice

Prove the parts fit before dividing areas

Stock is material purchased for further work. Nesting arranges part outlines on stock to reduce waste. An area ratio cannot prove a layout fits. Check dimensions, orientation, grain direction where relevant, edge margins and spacing.

Kerf is the width removed by a cut. An offcut is leftover stock; a usable offcut may be saved. Include trim cuts and holding allowances before promising a part count.

Illustrative layout: a 1,000 mm bar supplies 98 mm blanks. Each blank requires one 2 mm separating cut, including the last blank, with no end trim. Ten blanks consume 10 × (98 + 2) = 1,000 mm. A different last-cut arrangement would need a different cut count.

Practice kerf allowance

Test the next-blank threshold; Interactive; Practice

Test the next-blank threshold

Predict first: can the same 1,000 mm stock still supply ten 98 mm blanks if separating kerf increases from 2 to 3 mm? What happens to stock cost per blank when the stock price stays $48?

This one-dimensional lab reserves a full separating kerf after every blank, including the last. Left and right excluded trim lengths already include their own cut losses. The layout does not use the far stock edge as a finished blank edge; it is a count under this policy, not a claim of globally maximum yield.

Usable interval U = stock length L − left excluded trim − right excluded trim
Blank count n = floor[U / (blank length b + separating kerf k)]. Round down to a whole number. There are n separating cuts, plus any preparation already accounted for in excluded trim.

0 mm1,000 mmPrepared interval: 0 to 1,000 mm

Each outlined block is an actual 98 mm blank; the narrow filled band after each is its full 2 mm kerf. Ten blanks plus ten kerfs fill this stock exactly. On narrow screens, scroll sideways to inspect the full bar.

Material balance: 1,000 mm = 0 excluded trim + 980 acceptable blanks + 20 separating kerfs + 0 offcut. Utilization = 980 / 1,000 × 100 = 98.0%.

Change the kerf to 3 mm: ten blanks would need 10 × (98 + 3) = 1,010 mm, so only nine fit. The new balance is 1,000 = 0 + 882 + 27 + 91 mm. The 91 mm offcut is 10 mm short of another 101 mm blank-and-kerf interval.

Allocate the whole stock charge: $48 / 10 = $4.80 per acceptable blank in the original layout; $48 / 9 ≈ $5.33 after the kerf change. All equal-cross-section blanks are assumed acceptable. No remnant credit or processing cost is included. If zero blanks fit, cost per blank is undefined.

Another threshold: at 2 mm kerf, 999.99 mm stock fits nine blanks, while 1,000.00 mm fits ten. This lab uses hundredths of a millimeter and currency cents; its bounded illustrative values are not machine settings. It is not a two-dimensional nesting tool.

Practice stock layout and balance Practice a count threshold

Use a consistent physical basis for utilization; Practice

Use a consistent physical basis for utilization

Utilization = material in acceptable parts / material purchased × 100%. Compare length for the same cross-section, area for the same thickness, or mass on a consistent basis.

The bar example gives 980/1,000 × 100 = 98.0%. The remaining 2% is kerf. Distinguish reusable offcuts from material discarded.

Supporting detail: Addendum 3 — Why 20% loss means a 25% increase per useful amount.

Practice utilization

Charge each part its share of stock and waste; Practice

Charge each part its share of stock and waste

Part material cost = share of stock charged to the part × stock price. A $48 sheet yielding eight identical acceptable blanks gives $48 × 1/8 = $6.00 per blank when the whole sheet is charged to those blanks. This includes their share of kerf and unusable offcuts.

Finished-part area divided by stock area can understate cost by leaving waste unassigned. State any credit for reusable remnants. Add delivery only if it is not already in the stock price.

Practice stock cost

Multiply quantity by unit cost for each BOM line

Multiply quantity by unit cost for each BOM line

A bill of materials (BOM) lists the components and quantities needed for one product. Add quantity × unit cost for every line.

Illustrative material-only BOM
ItemQuantityUnit costLine cost
Blank2$6.00$12.00
Standard fastener4$0.25$1.00
Material total$13.00

This is not finished product cost. Add processing, assembly and other applicable costs using Manufacturing Cost and Volume.

Materials and Manufacturing Processes/Foundations

Outsourcing

Decide which activities to keep in-house or place with suppliers, weighing relevant costs and capabilities alongside quality, capacity and delivery.

Compare equivalent acceptable parts over the same period

Compare equivalent acceptable parts over the same period

Outsourcing means arranging for an outside supplier to carry out work for the business rather than doing it internally. The work may be making a component or providing a service. A make-or-buy comparison is one application of that broader decision.

A core competence is a capability central to what the business does particularly well. Outsourcing may free resources to focus on those strengths, but it also makes the business depend on suppliers for the work they perform. Compare costs alongside capacity, quality, delivery and capabilities worth retaining. See OpenStax: Outsourcing and core strengths.

Make means produce internally; buy means purchase from a supplier. Define quantity, specifications and delivery date before comparing options. Use Manufacturing Cost and Volume for an initial cost comparison.

Include avoidable setup, tooling, material and processing for make; purchase price, freight, incoming checks and expected rework for buy. Compare costs that change with the decision. Shared rent that remains after outsourcing is not automatically a cash saving.

Start here: decide which future costs change between the two routes, then compare their totals. A relevant cost changes with the choice. An avoidable cost is removed by choosing the other route; a sunk cost has already been incurred and cannot be recovered. Fixed, direct and allocated describe costs, but those labels alone do not establish relevance.

Supporting detail: Addendum 4 — Why the cost boundary matters.

Worked case: which costs change for 100 parts?; Practice

Worked case: which costs change for 100 parts?

This original hypothetical order needs 100 acceptable brackets delivered within one month. All amounts below are illustrative dollars, not supplier prices or facts about a particular shop. For the numeric comparison, assume both routes supply the same specification and acceptable quantity by that deadline.

Making needs a new $300 setup and $9 per acceptable part ($6 material plus $3 additional processing). Buying needs a $10 per-part quote, a separate $0.50 incoming check per part, and $100 freight for the order. The quote excludes those checks and freight. These are future payments incurred only for their respective routes.

The $600 shared rent for the month is paid unchanged either way. A $200 study was paid for last month and is irrecoverable. Assume spare internal capacity, no displaced work or alternative income, and no other route-dependent costs or credits. These are case assumptions; spare time alone does not establish that opportunity cost is zero in a real decision.

Predict before reading the totals: does making's lower per-part charge outweigh its new setup at this quantity? Which two amounts should be excluded from the relevant-cost totals?

Relevant-cost ledger — the same 100 acceptable parts and one-month boundary
Cost and treatmentMakeBuy
New setup: avoidable if buying$300$0
Material + additional processing: $9 × 100$900$0
Supplier quote: $10 × 100$0$1,000
Separate incoming checks: $0.50 × 100$0$50
Freight: once per order$0$100
Shared rent: $600 either way, excluded——
Past study: $200 irrecoverable, excluded——
Total relevant cost$1,200$1,150

Here “—” means excluded from this comparison, not a zero expense. Make = $300 + $900 = $1,200; buy = $1,000 + $50 + $100 = $1,150. Buying is $50 lower under the stated assumptions. The new setup matters even though it is fixed for this order: buying avoids it. Adding the unchanged rent to both sides would leave the $50 difference unchanged; adding it only to make would invent a saving.

For a quantity sensitivity check, use the existing Manufacturing Cost and Volume explorer with A as make ($300 setup, $9/part) and B as buy ($100 order freight, $10.50/part). Identify relevant costs first; the explorer cannot decide which costs belong. Do not add freight or checks again after including them in those inputs.

Practice: include the avoidable setup Practice: count buying charges once

A cheaper quote can still be the wrong choice; Practice

A cheaper quote can still be the wrong choice

FactorQuestion
CapacityIs machine and staff time available? What other useful work would be displaced?
QualityCan each route meet the specification consistently, and how will it be verified?
Lead timeCan the route deliver when needed, including queues and transport?
Core competenceIs this capability central to what the organization does well and needs to retain?
RiskWhat happens if demand changes, a supplier fails or the design changes?

Standard parts often favor buying; distinctive capabilities may favor making. Neither is a rule based on volume alone.

The worked case establishes a conditional cost difference. It does not verify a supplier's quality, available capacity or delivery promise. Before committing, obtain evidence that each route can meet the requirement. If making displaces another useful job, include the benefit given up; if buying adds rework, expediting or other costs, revise the ledger. See OpenStax: Make or buy a component for avoidable fixed costs and the qualitative checks alongside the numeric analysis.

Practice: what does the result support?

Check assumptions before committing resources; Checklist; Practice

Check assumptions before committing resources

  • Define matching requirements, quantity and timing.
  • List relevant costs and identify charges already included in rates.
  • Check capacity, quality evidence, lead time and supplier dependence.
  • Repeat the comparison at lower and higher plausible demand.
  • Record what would change the decision.

Review Design for Manufacturing before treating a costly design as fixed.

Practice: separate unchanged and sunk costs

Materials and Manufacturing Processes/Foundations

Design for Manufacturing

Make the required function easier to produce, assemble, inspect and maintain.

Keep the function and simplify how it is made

Keep the function and simplify how it is made

Design for manufacturing (DFM) considers production while a design can still change. Preserve required strength, fit and service performance; remove complexity that serves no requirement.

  • Reduce separate parts when this simplifies production and service.
  • Use standard components and available stock sizes.
  • Match geometry to the process and provide tool and inspection access.
  • Make assembly easy to orient, reach and verify.

Fewer parts can reduce joining work, but one complex part may need costly tooling or be hard to repair. Compare the whole route.

Specify only the precision the function needs

Specify only the precision the function needs

A tolerance is the allowed variation in a dimension or other feature. Tight tolerances may require careful setups, slower processing and more capable inspection. Keep tight control where fit or function needs it; do not apply it everywhere by habit.

No machine name guarantees a tolerance or price. Geometry, material, tooling, setup and measurement all matter. Confirm capability for the actual feature.

Supporting detail: Addendum 5 — Why the loosest tolerance is not automatically cheapest.

Reduce material loss without shortening useful life; Checklist

Reduce material loss without shortening useful life

Use Material Utilization and Cost to compare layouts. Also consider energy, durability, repair, disassembly and practical material recovery at end of life. A lighter part that fails early may consume more resources over its service life.

  • Identify each part's function and critical features.
  • Check standard components and stock sizes.
  • Sketch manufacturing, assembly and inspection access.
  • Check tolerances against function and process capability.
  • Compare material use, service life and repair or recycling options.
Supporting detail

Addendum

Additional evidence, standards context, and background referenced from the main text.

  1. Materials and Manufacturing Processes/Foundations/Manufacturing Cost and Volume

    Addendum 1. Why a shorter cycle does not reduce every cost equally

    A 10% reduction in a time-based processing charge reduces that portion by 10%. Material, setup and rent do not automatically fall. Capacity limits, tool replacement, scrap and quantity discounts can change the model outside its assumed range.

    Back to reference 1

  2. Materials and Manufacturing Processes/Foundations/Manufacturing Cost and Volume

    Addendum 2. When there is no positive crossing

    Equal variable costs mean the lower fixed cost wins, or both routes tie everywhere if fixed costs also match. A negative crossing lies outside positive production quantities. For a fractional crossing, compare costs at the neighboring whole-part quantities. This is process-cost break-even, not sales-revenue profit break-even.

    Back to reference 2

  3. Materials and Manufacturing Processes/Foundations/Material Utilization and Cost

    Addendum 3. Why 20% loss means a 25% increase per useful amount

    If 80% of purchased material reaches the product, one useful unit needs 1/0.80 = 1.25 purchased units, not 1.20. State whether a waste percentage is based on purchased material or on the useful amount.

    Back to reference 3

  5. Materials and Manufacturing Processes/Foundations/Design for Manufacturing

    Addendum 5. Why the loosest tolerance is not automatically cheapest

    A tolerance that permits poor fit can increase assembly trouble, rework and failure. The goal is a manufacturable design that still meets requirements.

    Back to reference 5