Robert Lafreniere is the supply manager of Air West Mechanical (AWM), an HVAC contractor. AWM was recently awarded a contract to provide the HVAC system in a large building that houses a research lab. The system requires 650 feet of 10-inch diameter, 16-gauge stainless steel pipe to vent the lab exhaust.

When the cost estimator at AWM prepared the original bid, she assumed that the pipe will be fabricated in-house. A month before the project gets underway, the operations manager, Shawn Radom, asked Robert “how much would it cost to purchase the stainless-steel pipe instead of making it in-house? It looks like the shop will be working near full capacity next month and sheet metal work is not our expertise. Buying it may be less costly than making it.”

Robert did a thorough search of the market and found that most suppliers were asking from $27 to $30 per linear foot for 650 feet of 10-inch-diameter, 16-gauge stainless steel pipe. He was pleasantly surprised, however, to find a supplier who would provide 10-foot pipe sections for $23 per linear foot, delivery included.

The cost estimator being on vacation, Robert worked with Shawn to estimate the manufacturing cost. Making pipe requires two steps. First, a flat sheet of steel is formed into a cylinder through rolling. Then the seam is joined by welding. The AWM’s equipment took 5 minutes to roll a 10-foot section, including loading and unloading. Welding a 10-foot section took 10 minutes. Labour rate was $32 per hour. Overhead cost was 50% of labour cost.

Shawn calculated that to make a 10-inch diameter pipe a stainless-steel sheet 30-inches wide could be enough. He also found out that a square foot of 16-gauge steel weighs 2.5 pounds. Robert found in his records that the price AWM paid for 16-gauge steel sheets was $2 per pound. Finally, the cost of welding wire and gas for a 10-foot section was estimated to be around $2.50.

1. Calculate the labour cost of making a 10-foot section of the pipe. Show your work.
2. Calculate the stainless-steel cost of making a 10-foot section of the pipe. Show your work.
3. Calculate the total cost of making a 10-foot section of the pipe. Show your work
4. Which option, make or buy, is best? Show your work.

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