Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 56

Make or Buy Bernard’s Specialty Manufacturing (BSM) produces custom vehicles—limousines, buses, conversion vans, and small trucks—for special order customers. It customizes each vehicle to the customer’s specifications. BSM has been growing at a steady rate in recent years in part because of the increased demand for specialty luxury vehicles. The increased demand has also caused new competitors to enter the market for these types of vehicles. BSM management considers its competitive advantage to be the high quality of its manufacturing. Much of the work is handmade, and the company uses only the best parts and materials. Many parts are made in-house to control for highest quality. Because of the increased competition, price competition is beginning to become a factor for the industry, and BSM is becoming more concerned about cost controls and cost reduction. It has controlled them by purchasing materials and parts in bulk, paying careful attention to efficiency in scheduling and working different jobs, and improving employee productivity.

The increased competition has also caused BSM to reconsider its strategy. Upon review with the help of a consultant, BSM management has decided that it competes most effectively as a differentiator based on quality of product and service. To reinforce the differentiation strategy, BSM has implemented a variety of quality inspection and reporting systems. Quality reports are viewed at all levels of management, including top management.

To decrease costs and improve quality, BSM has begun to look for new outside suppliers for certain parts. For example, BSM can purchase a critical suspension part, now manufactured in-house, from Performance Equipment Inc. for a price of $105. Buying the part would save BSM 10 percent of the labor and variable overhead costs and $68 of materials costs. The current manufacturing costs for the suspension assembly are as follows:

Ma teria ls	$192
Labor	75
Variable overhead	150
Fixed overhead	150
Total cost for suspension assembly	$567

Required

1. How would total costs be affected if BSM chose to purchase the part rather than to continue to manufacture it?

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2. Should BSM purchase or manufacture the part? Include strategic considerations in your answer.

Step 1 of 3

Fixed costs are costs which does not changes with change in level of production. Variable costs are costs which does changes with change in level of production.