Three different costs wearing one price tag

You machine the shafts, the housing and the end caps. You buy the bearings, the seals, the worm set and the hardware. Then somebody at a bench puts it all together, fills it with oil, runs it in and paints it. The customer wants one number.

Work out your own shop rate → Free, no account, five minutes.

Most shops get to that number by costing the machined parts properly — setup, run time, material, shop rate — and then adding the bought parts at whatever the vendor charged, plus a couple of hours for assembly at the machine rate because that is the only rate they have. Every step in that sentence is wrong in a different direction, and the errors do not cancel.

An assembly price is three costs that behave differently. Machined content is dominated by setup, so it collapses as quantity rises. Bought content is nearly flat per unit and barely moves. Assembly labor is almost purely per-unit. Blend them into one line and you cannot see any of that, which is why shops that build equipment are usually right on the machining and quietly wrong on everything else.

A $22.40 bearing does not cost you $22.40. It costs you $22.40 plus everything that had to happen for that bearing to be sitting in the right bin on the right day.

Somebody found a vendor, compared two quotes, cut a purchase order, chased it when it did not show, received it, checked the part number against the print, and put it away. Call that twenty-four minutes per line item — and it is per line item, not per part, because ordering four bearings takes the same phone call as ordering one. On a five-line bill of materials that is two hours of office time. At $55 an hour, $110 per order.

Then there is inbound freight, which for small orders of industrial components runs 3 to 5% of value and is often more when a vendor drop-ships one seal overnight because you forgot it. There is the one that gets ruined: a seal nicked on the shaft shoulder, a bearing dropped on concrete, a gear set with the wrong bore that you opened before you noticed. Two percent of bought value is a conservative allowance and most shops that measure it find they are higher.

There is money. If you pay the vendor thirty days before you ship and get paid thirty days after, you are financing $272 of somebody else's product for sixty days. At 10% that is $4.47 per unit — small, real, and multiplied by every unit you build.

And there is warranty. When a seal weeps at the customer's plant, you go, not the seal manufacturer. You own the failure of every component in that box whether you made it or not. One percent of bought value is a floor, not a cushion.

So the answer to whether a bought part carries markup is: it has to carry at least 8.6% just to break even, and that is the part of the question people skip. The real argument is about what goes on top of that, and it is not obvious, because the customer can price a bearing on the internet in about nine seconds.

The practical resolution most equipment builders land on is a lower markup on bought content than on machined content — 15 to 25% against 30 to 40% — and never itemizing the bought parts on the quote. You are not selling a bearing. You are selling a gearbox that has the right bearing in it, sized correctly, in stock, with somebody standing behind it. Break that out as a line item and you have invited a conversation about a commodity price you cannot win.

The exception is genuine pass-through: the customer specifies a $4,200 motor by part number, insists on their brand, and you are effectively a shipping address. Mark that at 10% for handling and warranty, say so plainly, and put your margin where you actually added something.

A shop rate is built from machine depreciation, burdened labor, power, an overhead share and consumables. Two of those five barely exist at an assembly bench. There is no spindle wearing out. There is no ten-kilowatt draw. What is left is a person, a bench, a torque wrench, a press, and some Loctite.

Billing assembly at your $95 machine rate makes you 111% too expensive on that block of the job. On a gearbox with two hours of assembly, that is $100 of imaginary cost per unit — enough to lose a twenty-five piece order and never learn why.

The opposite error is worse and more common: not charging for assembly at all, on the theory that it is only a couple of hours and the machining is where the money is. Assembly time is the one cost in the whole quote that does not shrink with quantity. It is the same 1.9 hours on unit one and unit twenty-five. At high quantity it is a bigger share of the price than the machining, and shops that treat it as a rounding error get exactly the volume orders they are worst at.

Assembly has a setup of its own, too. Staging the kits, reading the print, building the first one slowly, deciding the order of operations, discovering the dowel does not clear the boss. Call it two hours per order, paid once, exactly like a machine setup.

This is the prorating error, and it is the single most expensive mistake in assembly quoting.

The gearbox uses two identical output shafts. The customer orders five gearboxes. That is ten shafts, and they go through the lathe in one setup. Not five setups of two.

It happens because of how quoting gets done: you cost the gearbox, then multiply by five. Every quoting tool aimed at small shops prices a part at a time, so the assembly is built by adding up part prices, and each of those part prices already contains a full setup. Multiply and you have multiplied the setups too.

On this gearbox the three machined parts carry $403.75 of setup between them. Charged once per order, that is $80.75 a unit across five. Charged once per gearbox, it is $403.75 a unit — $323.00 of pure fiction per unit, which after markup pushes the quote from $1,074.12 to $1,510.17. You are 41% over on a job you could have had.

Here is a shaft-mounted worm gear reducer. Three machined parts, five bought lines, assembly and run-in. Shop rate $95, assembly rate $45, office hour $55.

Setup across the three parts is $403.75 and is paid once per order. The per-unit machining is two shafts at $51.25, one housing at $180.50 and two caps at $25.00, which is $333.00 a gearbox.

The bought package is four tapered roller bearings at $22.40, two shaft seals at $7.20, a worm and wheel set at $148.00, a fastener, key and dowel kit at $11.00, and a breather, sight glass and fill of oil at $9.00. That is $272.00 at list and $295.51 landed and carried, from the table above, plus $110.00 of purchasing time per order.

Assembly is 1.4 hours to build and 0.5 hours to run in, test and paint — 1.9 hours at $45.00, or $85.50 a unit — plus a two hour assembly setup at $90.00 per order.

So the job has $603.75 of costs that happen once no matter how many you build ($403.75 machining setup, $110.00 purchasing, $90.00 assembly setup), and $714.01 of cost per unit ($333.00 machining, $295.51 bought, $85.50 assembly).

Markup: 35% on machined content, 20% on bought content, 30% on assembly labor.

Two things in that table are worth more than the rest of this article. The first is the shape of the curve: from one unit to five the price drops 37%, and from five to twenty-five it drops only another 12%. Customers who have been trained by pure machining work expect the price to keep falling and it does not, because bought content and assembly labor do not care how many you build. Being able to say that out loud, with the split behind it, is a better answer than a discount.

The second is what happens to the mix. At quantity one the bought parts are 28% of the price and the machining is 58%. At twenty-five the bought parts are 38% and the machining is 50%. The bigger the order, the more of your price is something you did not make — which is exactly the situation where charging list price for bought components stops being a small leak and becomes the whole problem.

One honest complication: at twenty-five gearboxes you are buying a hundred bearings, and your vendor will very likely drop them from $22.40 to around $19.60. That is $11.20 a unit of cost you did not have at quantity five. Whether you pass it on is a pricing decision, but you should know it exists — most shops quote the twenty-five off the same vendor price they used for the five and hand the customer a discount by accident.

You quote in March. They order in June. The bearing vendor sent a letter in April.

On machined parts this barely matters, because your material is a modest share of the part cost and your labor rate is under your own control. On assemblies it matters a great deal, because bought content is 30 to 40% of the price and none of it is under your control.

Run the numbers. A 7% increase on $272 of bought content is $19.04 a unit. On the twenty-five piece order that is $476.00 against $5,222.75 of gross profit — 9.1% of the entire margin on the job, gone, from one envelope you did not open. A 15% move on the worm set alone, which is the kind of thing that happens when a gear house changes owners, is $22.20 a unit and $555.00 on the order.

This is the question the whole exercise exists to answer, and you cannot answer it from a total. You need the profit broken out by block.

On the twenty-five piece order above, the $208.91 of gross profit per unit is $122.20 from machining, $59.98 from bought content and $26.73 from assembly. That is a healthy assembly. Now imagine the same gearbox where the housing is bought as a casting you only face and bore, the shafts come in cut to length, and the bought content is 60% of the price. The machining profit collapses, and if you are selling the bought parts at list you are running an unpaid warehouse with a lathe in the corner.

Some practical checks, all of which need cost tracked by block rather than by job total:

Most shops have every number in this article already. The setup times are on the router, the vendor prices are on the invoices, the assembly hours are on a timecard. What is missing is the structure that keeps them separate long enough to see which block is earning and which is not. That is the whole of it — three costs, three markups, one price, and a lot size that is the order times the parts per unit rather than the order itself.

Spindlerate keeps the machined parts, the bought components and the assembly hours as separate blocks with their own rates, and works the lot size out from the parts per assembly, which is the correction that is otherwise made by hand and usually is not.