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

Exercise 53

Value-Chain Analysis Sheldon Radio manufactures yacht radios, navigational equipment, and depth-sounding and related equipment from a small plant near New Bern, North Carolina. One of Sheldon’s most popular products, making up 40 percent of its revenues and 35 percent of its profits, is a marine radio, model VF4500, which is installed on many of the new large boats produced in the United States. Production and sales average 500 units per month. Sheldon has achieved its success in the market through excellent customer service and product reliability. The manufacturing process consists primarily of the assembly of components purchased from various electronics firms plus a small amount of metalworking and finishing. The manufacturing operations cost $110 per unit. The purchased parts cost Sheldon $250, of which $130 is for parts that Sheldon could manufacture in its existing facility for $80 in materials for each unit plus an investment in labor and equipment that would cost $35,000 per month.

Sheldon is considering outsourcing the marketing, distributing, and servicing for its units to another North Carolina firm, Brashear Enterprises. This would save Sheldon $125,000 in monthly materials and labor costs. The cost of the contract would be $105 per radio.

Required

1. Prepare a value-chain analysis for Sheldon to assist in deciding whether to purchase or manufacture the parts and whether to contract out the marketing, distributing, and servicing of the units.

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2. Should Sheldon (a) continue to purchase the parts or manufacture them and (b) continue to provide the marketing, distributing, and servicing or outsource these activities to Brashear? Explain your answer.

Step 1 of 2

1.?The value chain for Sheldon Radio follows:

Value Activity	Option One	Option Two
First: Raw Materials	Sheldon not involved at this step in the value chain	Sheldon not involved at this step in the value chain
Second: Manufacture of parts for the radio	Sheldon not involved at this step in the value chain; the cost is $120 to Sheldon	Sheldon not involved at this step in the value chain; the cost of these parts is $120 to Sheldon (Note: $120 is the $250 total less $130 for purchased parts that could be manufactured)
Third: Manufacture of components	Sheldon purchases $130 of these parts	Sheldon manufactures these parts for $80 each plus monthly costs of $35,000
Fourth: Assembly	Sheldon’s costs are $110	Sheldon’s costs are $110
Fifth: Marketing, distribution and service	Sheldon’s costs are $125,000 per month	Sheldon contracts these services out to Brashear Enterprises for $105 each
Costs Summary: Costs which differ between the two options	Purchase of components:   $130 x 500 = $65,000 ?	Unit costs for manufacture of components ($80 x 500) + monthly cost of $35,000 for labor and equipment= $75,000 The total cost of purchase is less than the cost of manufacture by $10,000.
?	Monthly cost for marketing, distribution and service: $125,000	Monthly cost of Brashear contract: $105 x 500 =$52,500 The total cost of the Brashear contract is less than the cost of the inside service by $72,500