$523$: Easton Electronics

Easton Electronics in Irvine, California, is a contract manufacturer that assembles complex solidstate circuit boards for advanced technology companies in the aerospace and health sciences industries. The contract manufacturing industry is very competitive in terms of pricing and performance

$($quality and on$-$time delivery$).$ Outsourcing clients specialize in the design of sophisticated electronics products and then rely on their contract manufacturing partners $($like Easton$)$ to produce their

designs. Once a new product is designed, the advanced technology firm solicits firm, fixed$-$price bids

for the electronic components.

A completed electronic component consists of several assembled circuit boards, a box containing the boards, cables connecting the boards inside the box, cables connecting the box to other

components, and exhaustive testing of the complete box build. The technology firm either solicits

bids for each separate component $($box$,$ boards, and cables$)$ or selects an integrated supplier that can

deliver a completely assembled box that has been tested. After receiving the initial bids but prior

to selecting the winning bidder, the technology firm selects two or three finalists and then spends

Final PDF to printer

Responsibility Accounting and Transfer Pricing $207$

zim$6455$X$\_$ch$05\_161-215.$indd $20711/13/1501$:$22$ PM

considerable resources to qualify new suppliers by sending teams of engineers and purchasing specialists to inspect the bidders$$ manufacturing facility, procurement process, and quality programs.

Once a contract manufacturer is chosen, most clients are reluctant to switch to new suppliers$$because of the high search and startup costs of moving to a new supplier. Although some Easton

customers source their metal boxes, boards, and cables from different contractors and then assemble

the final electronic components into a complete unit that they test, most of Easton clients rely on

Easton to provide a complete unit $($box$,$ circuit boards, connecting cabling, and final testing$).$

Easton has recently acquired a wholly owned cable company $($TT Cabling$).$ With the acquisition,

Easton has two profit centers: Irvine $($which manufactures the boards, builds the complete box, and

assembles and tests it$)$ and TT Cabling $($which only makes and tests the cables$).$ Currently, TT$$sells

most of its cables to a different set of customers than those who have their boards built by Easton.

After the acquisition, Easton has a single sales force that sells board assembly, box build, and cables.

Easton assembles the electronic controller for a particular health imaging system for Scopics

Imaging $($SI$).$ Easton manufactures the circuit boards, buys a sheet metal box designed specifically

to house the boards, buys the cables to connect the boards within the box and other cables to connect

the box to other components, tests the box, and delivers the completed unit to SI to plug the box into

its imaging system.

Irvine currently purchases four cables for the SI program. The following table summarizes

Irvine$$s cost for ONE complete SI box:

Fixed Costs Variable Costs Total Costs

Metal box $$347$ $$347$

Circuit boards $$1,460*9,37510,835$

Cable harnesses $1,2751,275$

Box build and test $998*7201,718$

Total $$2,458$ $$11,717$ $$14,175$

$*$Represents the proportionate utilization of both equipment necessary to populate the circuit boards with components

and the testing equipment.

Although Irvine purchases the cables for the SI program from an outside cable company, Easton

senior managers are analyzing whether to have TT Cabling supply these cables. The managers of

TT$$Cabling have submitted a bid to Irvine of $$1,700$ for the four cables in the SI assembly. The

Irvine managers oppose buying the cables from TT because the TT bid of $$1,700$ is significantly

higher than the outside cable supplier $($$$1,275).$ The bid of $$1,700$ submitted by TT for the four SI

cables consists of variable costs of $$1,000,$ fixed manufacturing costs of $$300,$ and profits of $$400.$

The quality of the TT cables $($including reliability of delivery schedule$)$ is the same for both the

TT$$cables and the outside supplier of cables.

When bidding on new proposals that involve complete box builds, Easton management wonders

whether they should continue to solicit price quotes from outside cable suppliers only, solicit bids

from both outside cable suppliers and TT$,$ or only get price quotes from TT Cabling.

Required:

Write a memo to the senior managers of Easton electronics proposing a policy that describes how

Easton should decide whether to purchase cables externally or internally $($through TT$).$ The memo

should describe the decision$-$making process, the relevant considerations, and the underlying

objectives of such a policy. Use the SI cables as an example of how your Easton cable sourcing

policy should be applied.