Cost Management 6th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 46

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.
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.