Wally's Widgets Incorporated (WWI), located in Charleston, South Carolina, is in the widget industry. Widgets are components that are supplied as components to large manufacturers of specialized household electronic devices. Founded in 1988, WWI has enjoyed slow, steady growth. The widgets WWI makes are made by assembling two component parts: gidgets, which can be purchased from a company in Belgium, and gadgets, which WWI is already producing in its Charleston facility. Most of the consumer demand for widgets is in areas with relatively warm year-round climates. In the United States, widgets have sold well across the Sunbelt, stretching from the Carolinas south and west all the way to southern California. Because this is an area in the United States with a growing population, widget sales have done very well. 1 WWI wants to expand its presence in the widget market. After some work with a consultant, the conclusion was reached that the next major growth area for widget sales is overseas. Specifically, growth is anticipated to be strong along the Mediterranean coast of Europe, especially in the areas between Barcelona and Marseilles. At present, only one well-known European firm is building widgets, but the company is not marketing them very effectively. The consultant has indicated further that WWI has three viable options for producing and distributing widgets in the southern European market: 1. To assemble the widgets in Charleston and ship them to Europe. 2. To assemble the widgets in a free-trade zone near Marseilles and distribute them from that point. 3. To assemble the widgets in a free-trade zone near Naples and distribute them from that point. WWI's directors have given approval to establish a widget-manufacturing site wherever company leadership feels is the most appropriate location to serve the new market. Having received approval to proceed, the WWI research team conducted an in-depth market study and is projecting that the annual demand for widgets that WWI would build initially will be 20,000 units in Marseilles (for the French market) and 40,000 units in Barcelona (for the Spanish market). The labor costs per unit for assembly would be as follows: Charleston, $5.00; Marseilles, $4.50; and Naples, $4.25. Component and product weights are as follows: gidgets, 60 pounds each; gadgets, 40 pounds each; and assembled widgets, 100 pounds each. The purchase price of the components would be the following: gidgets, FOB Brussels, $25 per unit, and gadgets, FOB Charleston, $30 per unit (this is WWI's usual price to any customer with annual purchases in the range of 50,000 to 75,000 units). Freight rates are the same per CWT (100 pounds) for gidgets, gadgets and widgets. Rates, per CWT, are: Route Brussels to Charleston Brussels to Marseilles Brussels to Naples Charleston to Barcelona Charleston to Marseilles Charleston to Naples Marseilles to Barcelona Naples to Barcelona Naples to Marseilles Rate $1.65 $1.35 $1.95 $2.50 $2.60 $2.75 $.60 $.55 $.85 As just given, these rates also include insurance on the shipment as it moves from port to port (or on land within Europe). For purposes of this case, assume that import duties are based on the total product cost (the cost of inputs, labor, and assembling). The duty rates for completed widgets imported into each location are as follows: (not) Spain= 5 percent of product cost; (into) France= 10 percent of product cost; and (into) the United States= 15 percent of product cost. Based on what you have read in the case, calculate which option for building widgets you think will be the MOST expensive? Least expensive? a. Build in Charleston and export b. Build in Marseilles FTZ and export c. Build in Naples FTZ and export The following templates may be helpful to you as you calculate the total delivered cost for each of the three options listed above. Please calculate the total delivered cost for each of the three options and then justify which option you would select and why. Option 1 Build in Charleston Cost Gidgets from Brussels Gadgets from Charleston Total Inbound Costs Cost Gidgets price Gadgets price Assembly of widgets Total Mfg Costs Cost Transport widgets to Marseilles French duties on widgets Transport widgets to Barcelona Spanish duties on widgets Total Outbound Costs Total Inbound Costs Total Manufacturing Costs Total Outbound Costs Total Costs Inbound Costs Unit Cost Manufacturing Costs Unit Cost Outbound Costs Unit Cost To: Charleston # Units 60,000.00 60,000.00 In: Charleston # Units 60,000.00 60,000.00 60,000.00 From: Charleston # Units 20,000.00 20,000.00 40,000.00 40,000.00 GA $ Total Cost Total Cost Total Cost Option 2 Build in Marseilles FTZ Cost Gidgets from Brussels Gadgets from Charleston Total Inbound Costs Cost Gidgets price Gadgets price Assembly of widgets Total Mfg Costs Cost Transport widgets to Marseilles French duties on widgets Transport widgets to Barcelona Spanish duties on widgets Total Outbound Costs Total Inbound Costs Total Manufacturing Costs Total Outbound Costs Total Costs Inbound Costs Unit Cost Manufacturing Costs Unit Cost Outbound Costs Unit Cost To: Marseilles # Units In: Marseilles # Units From: Marseilles # Units GA $ Total Cost Total Cost Total Cost Option 3 - Build in Naples Cost Gidgets from Brussels Gadgets from Charleston Total Inbound Costs Cost Gidgets price Gadgets price Assembly of widgets Total Mfg Costs Cost Transport widgets to Marseilles French duties on widgets Transport widgets to Barcelona Spanish duties on widgets Total Outbound Costs Total Inbound Costs Total Manufacturing Costs Total Outbound Costs Total Costs Inbound Costs Unit Cost Manufacturing Costs Unit Cost Outbound Costs Unit Cost To: Naples # Units In: Naples # Units From: Naples # Units $ Total Cost Total Cost Total Cost