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Southern Air Conditioning Incorporated Case Solution
Southern Air Conditioning Inc. is a company that deals in the manufacturing of air conditioning units. Although based in New Orleans, the firm is hoping to venture out into new markets, and exploit and build the untapped consumer bases. Initially, the company dealt with supplying the parts for window units but is now hoping to move into the window unit market itself. Moreover, unsure of how SAI may perform in the well-established and competitive US markets, the president of SAI, after meeting with a consultant, has proposed a move into uncharted territory, specifically the Mediterranean region. This covers the area spanning over Spain, Portugal, France, Italy and possibly Turkey as well. The region, because of its prime characteristics that suit the potential demand for air conditioning units, would prove to be a very suitable area for SAC to venture into.
The consultant hired has proposed three alternatives, of which the most cost-efficient would prove to be optimal. The first option suggests that the window units production take place where the SAI plant is located, in New Orleans. The distribution network should then originate from there too. Meanwhile, the second option proposes that a free-trade zone, situated in Zaragoza, Spain be taken advantage of, and distribution should take place from that point. The third suggestion runs along the same lines as the prior; Turkey to has a free trade zone located in Istanbul, which could prove to be a good and cost-efficient alternative.
Case Study Questions Answers
To determine the viability of either of these options, all costs per unit need to be accounted for. The case study stresses the emphasis the production manager and distribution manager put on various aspects related to the choice of location. The production manager was of the view that labor costs should be minimized, while the distribution manager underlined the importance of transportation costs, insurance costs, import duties, and free trade zones. In an effort to quantify these concerns, a summary of the associated costs is also compiled. Using these amounts the production and distribution costs have been calculated for each option.
The first option, where production is proposed to be located in New Orleans, has a labor cost of $32.75. The direct material cost comprises of two components, widgets and gadgets. The first is sourced from Brussels, Belgium while the other is sourced from New Orleans, respectively. The assembled window units weigh 100lbs with gadgets contributing to 30lbs while gadgets contributing to 70lbs of the final product. However, since New Orleans is not a free-trade zone, the import of gadgets for use in the production process has an associated transport cost of $1.855. Moreover, a 7% import duty, amounting to $1.88, is also charged upon the combined cost of the component and transport cost. This leads to a figure of $28.73 as the total cost of digits. However, the cost of gadgets has no associated transport cost or import duty associated with it due to it being sourced in the same locality.
The total assembly cost per unit comes to $91.48. The distribution costs are further added to this cost. These costs include transportation costs, insurance costs, and import duties. Duties are imposed on the combined assembly, transportation and insurance costs. Turkey imposes an 18% import duty, while France, Italy, Spain and Portugal, all located in the EU impose a uniform import duty rate of 10%. As per these regulations, the total cost of assembly and delivery per unit peaks in Turkey’s case at $111.315. However, the rest of the countries are tied to around $103.
The second option wherein Zaragoza, Spain is put up as a worth contender sees labor cost assembly per unit amount at$38. Gadgets meanwhile have an added transport cost of $0.875, while gadgets have a transport cost of $0.855. However, no import duties are levied, which is an advantage gained here due to Zaragoza being a free trade zone. However, the cost-effectiveness gained from the cuts on duty is overcompensated by the exorbitant labor costs associated with the location. The total assembly cost, thus, adds up to $94.73. Meanwhile, the total cost, with transport, insurance, and import duties included lead to total costs adding up to $113 in the case of Turkey, $106.2 in France, $105.3 in Italy and $95.4 in Spain & Portugal.
The last option is a free trade zone located in Istanbul, Turkey. Again, as in Zaragoza, production in this location reaps the benefits of no import duties being levied on the raw material components imported from New Orleans and Brussels. In addition to this, the labor cost is also much cheaper than the other two options. Resultantly, the total assembly cost yielded is $82.72. Even along with the respective import duties and insurance and transportation costs, the total resulting costs are much less than as compared to the other two options. The assembly and distribution cost within Turkey itself amounts to $82.72. Meanwhile, France, Italy, Spain, and Portugal have total costs fluctuating between $92.14 and $92.58. Conclusively, the total costs incurred in Turkey pertaining to assembly and distribution are the lowest of all the three options.
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