Calculation

 

Case study Jaguar Electronics, Inc.

(This case study is derived from one written by Frank C. Burinsky and Michael A. McGinnis, Shippensburg University. The company name, product and component names, overseas locations for selling the products, and shipping costs have been changed to protect the actual company name and reflect changes in trade agreements and shipping practices.)

Jaguar Electronics, Inc. is a specialized electronics firm located in Charleston, South Carolina in the United States. The company was founded in 1965 and has enjoyed success and modest growth as a supplier of components to large manufacturers of specialty electronic-mechanical devices. Recently the company’s management has decided to begin manufacturing and marketing a product called the ‘Airflow’. The Airflow is manufactured by assembling two component parts:
(1) mechanical assemblies (MA), which are purchased from a company in Belgium; and (2) electronic assem­ blies (EC) manufactured by Jaguar Electronics at its Charleston facility.
Jaguar Electronics has manufactured and supplied
the electronic assemblies to several national manufac­ turers of products similar to the Airflow for several years. Most of the consumer demand for the final products comes from areas enjoying a relatively warm climate throughout the year. Accordingly, the manu­ facturers of those products have sold their goods with great success throughout the southern and southwest­ ern United States. The population and economic growth in these areas have contributed greatly to the success of this type of consumer product.
The man largely responsible for Jaguar Electronics’ proposed move into manufacturing and marketing Air­ flow is the company president, Mr Smith. He has spent his entire career in the electronics industry and was with Jaguar Electronics for several years before becom­ ing its president. His reign as president has been very successful. However, he has viewed the impressive sales growth of EC units with mixed feelings. As a supplier of EC components, Jaguar Electronics has prospered from the growth in sales of products such as Airflow. However, Smith has always felt that his company was not reaping all of the benefits available in sales to the consumers. At the same time he felt that Jaguar Elec­ tronics did not have the resources to compete success­ fully with the large firms that dominate the US market. Smith employed a consultant to determine where increasing consumer demand for Airflow-type prod­ ucts would approach a level sufficiently high to justify
entering these smaller markets. After reviewing the con­ sultant’s recommendations, Smith decided that Jaguar Electronics should target two of the higher-income countries in Latin America, Country 1 and Country 2. These nations, because of the income levels in particu­ lar cities, had the potential to be lucrative markets for Airflow. The consultant estimated the potential demand for Airflow to be 20,000 units per year in Country 1, and 40,000 units per year in Country 2.
The consultant had also recommended four options available to Jaguar Electronics as to how the widgets could be produced and distributed to these markets:
Assemble the widgets in Charleston and distribute them from that point.
Assemble them in Country 1,
and distribute them from that point.
Assemble them in a free trade zone in Country 2.
Assemble them in a free trade zone in another coun­
try, Country 3, which had no significant potential domestic market for Airflow, but a lower labor cost.
Smith held a meeting to brief his production manager, Daphne R. Feldblum, and his distribution manager, Karl Q. Winklepleck, on the proposed Airflow venture and the consultant’s recommendations. Both had been with the company for several years.
After briefing the two managers, Smith asked: ‘What course of action would you recommend?’ Feldblum replied: ‘We should probably assemble them where the labor cost would be lowest.’ Winklepleck commented: ‘We should also consider transportation rates, insurance rates, import duties, and free trade zones.’ Smith decided that Feldblum and Winklepleck should work together to compile the information nec­ essary for making the best possible decision.
Two weeks later the information shown in Tables 13.2 and 13.3 had been compiled.
With the data available, Smith had a meeting with
Feldblum, Winklepleck, and a member of the corporate legal staff to discuss what should be done. The meeting went poorly. Feldblum still believed that the company should locate assembly in the place with the lowest labor cost. Winklepleck realized that he should have provided a spreadsheet indicating total costs associated with each approach.

 

Table 13.2 Cost, demand, weight, and tariff data

Annual demand in Country 1 20,000 units

Annual demand in Country 2 40,000 units

Labor costs for assembly
in Charleston $5.00/unit
in Country 1 $4.50/unit
in Country 2 free trade zone $4.00/unit
in Country 3 free trade zone $3.75/unit

Cost of components
MA,FOB Brussels {Belgium) $25.00/unit EC, FOB Charleston $30.00/unit
Product weight
MA 60 lb/ unit
EC 40 lb/ unit
Airflow 100 lb/ unit
Import duties as a percentage of price paid)
United States 5%
Country 1 10%
Country 2 10%
Country 3 25%

Table 13.3 Combined rates for transportation and insurance between respective points

(Note: Projected sales volumes would justify shipping by container load. Though shipping rates would actually be charged per container load, for ease of calculation the rates below are shown as dollar costs per hundred pounds ($/cwt). If products were shipped in less­ than-container loads, rates would be much higher.)

From To Rate, $/cwt
Belgium us 1.65
Belgium Country 1 3.50
Belgium Country 2 3.00
Belgium Country 3 3.75
us Country 1 2.50
us Country 2 2.25
us Country 3 3.00
Country 1 Country 2 1.25
Country 2 Country 1 1.25
Country 3 Country 1 or 2 2.00
Footnote by Winklepleck: Ocean freight shipments from Belgium to Country 3 are very infrequent.
The total cost figures for assembling in Charleston and Country 3 appeared to be very close. If it was possible to obtain some type of free trade area in Charleston, or if the US government could refund duty on the component MA when the finished product was exported, Charleston would actually be less expensive. In any event, figures for all of the combinations should be carefully calculated.
Winklepleck also had some questions in his mind that he wondered if he should raise. They seemed to be important, but the president might not be pleased to have them brought up. If assembly were to be done overseas, how would quality be controlled? Should the company consider making a product for export that it thought it couldn’t market successfully in the United States? Did the company have the resources needed and was it prepared to make the effort required to begin marketing internationally: establishing market­ ing channels, product promotion, etc.? How Jong would it take to reach the projected sales overseas, and

 

what would be needed to promote the product? How sure could they be that they could ever sell the expected number of units in each of the two overseas markets?

Questions
Calculate the total costs if the Airflow is assembled in Country 1 vs. Country 2, vs. Country 3. Note that Country 2 and 3 have a foreign trade zones and Country 1 does not. Note also that
calculations should be done for total sales to supply the two countries.
Which country should they select to assemble the Airflow to maximize profit?
If the duty rate for Country 2 increases to 20%, how would this change your answer in question #2?

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