Question

Value chain and classification of costs, computer company. Dell Computer incurs the following costs:
a.   Utility costs for the plant assembling the Latitude computer line of products
b.    Distribution costs for shipping the Latitude line of products to a retail chain
c.    Payment to David Newbury Designs for design of the XPS 2-in-1 laptop
d.    Salary of computer scientist working on the next generation of servers
e.    Cost of Dell employees’ visit to a major customer to demonstrate Dell’s ability to interconnect with other computers
f.    Purchase of competitors’ products for testing against potential Dell products
g.    Payment to business magazine for running Dell advertisements
h.    Cost of cartridges purchased from outside supplier to be used with Dell printers

Required:
Classify each of the cost items (a–h) into one of the business functions of the value chain

Answer 1

The costs as given in questions are classified into following business functions of value chain and associated explanations are provided :

1. Production

Utility costs include use of the factory and providing for rent and electricity needed to assemble the plant. These costs are therefore categorized as production costs.

2. Distribution

Distribution activity takes place after the product is out of production i.e. factory for sale. The activities in distribution includes shipping the products amongst others and hence, it adds to the value of distribution.

3. Design of products and services

This chain includes the costs related to architecture and other aiding costs to develop the product models.

4. Research and development

This includes studying the technology available and developing prototype. The task is certainly performed by employee who is paid salary and as a result, adds to research and development value chain.

5. Customer service or marketing

The employee has made an effort to visit the customer to make sure the customer gets the products. This can easily be classified as customer service cost.

6. Design of products and services (or Research and development)

Well the purchase objective is not asserted in the question. Hence, we have assumed the competitor’s product are being tested to help design the products and services. If it has been bought for research, then research and development.

7. Marketing

Dell is using an advertisement medium to showcase the products along with the features and price. This markets the products well and helps them get the sales from customers.

8. Production

Though bought from outside, cartridge is an accessory to be supplied with final product. Basically, it forms the whole package of printer. Thus as per general business convention, it adds to production value.

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Answer 2

a:utility cost for