CNC Job Shop Quote: Machine Hour Rate vs. Cost Build-Up
A job shop is quoting a 2,000-piece run of a turned stainless 303 part. The shop's 3-axis lathe has a fully burdened machine hour rate of $85/hr. Cycle time is estimated at 4.5 min/part, with 0.5 min/part load/unload. Material is 25 mm 303 bar at $9.50/kg; each part uses 0.35 kg of bar including drop/scrap. Tooling cost is $0.40/part. Setup is 3 hours at $85/hr plus a $300 fixture that is dedicated to this job. Inspection is 0.5 min/part at $45/hr. The shop targets a 20% gross margin on price (not a 20% markup on cost). A competitor has quoted $14.00/part. The shop's historical scrap rate on this family is 3%, and the customer requires 100% on-time delivery with a 4-week lead time.
1. Build the per-part cost and the minimum price at a 20% gross margin. Compare to the competitor.
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Per-part variable cost:
- Machine time: (4.5 + 0.5) min = 5.0 min = 0.0833 hr × $85 = $7.08
- Material: 0.35 kg × $9.50 = $3.33
- Tooling: $0.40
- Inspection: 0.5 min = 0.00833 hr × $45 = $0.38
- Subtotal variable ≈ $11.19/part
Fixed/setup allocation (2,000 pcs):
- Setup: 3 hr × $85 = $255; fixture $300 → $555 ÷ 2,000 = $0.28/part
Total cost ≈ $11.47/part, before scrap. With 3% scrap, effective cost ≈ $11.47 / 0.97 ≈ $11.82/part.
Price at 20% gross margin (price = cost / (1 − 0.20)): $11.82 / 0.80 ≈ $14.78/part.
The competitor's $14.00 is below the shop's margin-target price. At $14.00, gross margin = (14.00 − 11.82)/14.00 ≈ 15.6%, below the 20% target.
2. Should the shop match $14.00? What factors decide it?
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Matching $14.00 yields ~15.6% margin - below target but still positive contribution. Decide on:
- Contribution vs. absorption: if the lathe has idle capacity, the job absorbs fixed overhead and the incremental contribution (price − variable cost ≈ $14.00 − $11.19 = $2.81/part, ~$5,620 total) may justify taking it. If capacity is tight and could be sold at full margin, do not match.
- Strategic value: a 2,000-piece repeat customer with 4-week lead time may be worth a margin concession if it leads to follow-on work; otherwise protect margin.
- Risk: the 3% scrap assumption and 4.5 min cycle are estimates. If cycle slips to 5.5 min, cost rises ~$1.42/part and the $14.00 price loses money. Build in a contingency or validate the cycle with a trial run.
- Counter-offer: quote $14.50–$14.78 with a note on the tighter tolerance/inspection scope, or offer $14.00 at a larger quantity that spreads setup and improves margin.
3. What would you verify before committing to the 4.5 min cycle time?
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Run a trial or reference a proven similar part: confirm cutting parameters (SFM, feed, depth of cut) for 303 stainless, tool life and the $0.40/part tooling estimate, chip control, and whether the 0.5 min load/unload is realistic with the actual chuck and part weight. Check that the 3% scrap rate applies to this geometry (303 can be gummy; chip control and finish issues may raise scrap). Verify inspection time against the actual print tolerances. If the trial shows 5.0+ min, re-quote before accepting the order rather than absorbing the overrun.