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									Clear Hear Manufacturing:
   1) Make recommendations to the company for on whether to accept order from Big Box and if the
       offer is to proceed, determine what mix of cell phones to use

   2) What is best way to increase revenue for the company to achieve ideal production levels

   2) Determine how fixed and variable costs should be adjusted to maximize profit, and

   3) Identify methods to reduce costs.

Scenario: Clear Hear is a manufacturer of cell phones, where Kendra Sherman works as a business
development specialist. Kendra anxiously awaits her appointment with Lisa Norman, the production
manager for Clear Hear. Kendra has secured an order for 100,000 cell phones that are nearly identical
to Clear Hear’s Alpha model, which will support a promotion that a major chain, Big Box, is running
with a telephone service provider. The delivery date is in 90 days. Lisa is interested, in part, because
she has an excess capacity of 70,000 cell phone units over the next 3 months, and part of her bonus is
based on running the factory at capacity. The larger part of her bonus, however, is based on factory total
profitability. Big Box, however, will not pay more than $15 for each of the cell phones, which are
based on the $20 per unit Alpha model, lessening Kendra’s enthusiasm. Clear Hear runs two production
lines at its factory. The other line produces the Beta model, which has more features. The Beta model
sells for $30 but also costs more to produce. Lisa knows that she could switch production of 30,000
units from the Beta model to Alpha to complete the order.

Just last week, however, an Original Equipment Manufacturer (OEM), which has extensive experience
manufacturing cell phones for other brands and has won several quality awards for its manufacturing
processes, showed Lisa a prototype of the Alpha unit. The OEM sought to convince Lisa that not only
could they produce up to 100,000 units of the Alpha on short notice, but the performance of the cell
phone would be identical to Clear Hear’s product. The price would be a nonnegotiable $14 per unit.
After the meeting, Lisa reviewed the last month’s unit profitability report that revealed the following:
Table 1
Unit Profitability Report    Alpha model Beta model
Price per unit               20             30
Variable cost per unit       8              12
Fixed overhead               9              10
Profits                      3              8

Note. All unit prices are in dollars. Unfortunately, although unit profits were good and cost controls met
factory standards, the underutilization of capacity deprived Lisa and the factory of profits that could
have been earned on an additional 70,000 units. Kendra wants to know if she should accept the order
from Big Box. As Lisa Norman thinks about how to proceed, she studies Clear Hear’s statement of
values. Clear Hear’s values include the following: • Keep our employees working. • Provide our
customers with products on time and that reliably meet or exceed their expectations. • Treat our
business partners the same as we want to be treated.
SOLUTION

The objective of the case study is to find alternatives ways to complete the Big Box order such that
total profitability is maximized (Revenue is maximized and cost is reduced)

To complete the order there are four alternatives

Alternative 1 : Utilize existing capacity of 70000 units to produced Alpha and switch production of
30,000 units from the Beta model to Alpha

Alternative 2 : Utilize existing capacity of 70000 units and buy 30,000 units from Original Equipment
Manufacturer (OEM)

Alternative 3: Buy 1000000 Original Equipment Manufacturer (OEM)

Alternative 4: Do not accept the order from Big Box

Evaluation of each alternative

Note: The total fixed cost would not be affected whether we accept the Big Box order.

Alternative 1 : Utilize existing capacity of 70000 units to produced Alpha and switch production of
30,000 units from the Beta model to Alpha

So Additional Net Income generated = 100000*(Selling Price – Variable Cost) – Opportunity cost of
not producing 30000 Beta Units
= 100000*(15-8) - 30000*(30-12)
= $160,000

Alternative 2 : Utilize existing capacity of 70000 units and buy 30,000 units from Original Equipment
Manufacturer (OEM)

Additional Net Income generated
= 100000*Selling Price – 700000*Variable Cost – 30000*Cost per unit paid to OEM
= 100000*15 - 70000*8 - 30000*14
= $520,000


Alternative 3: Buy 1000000 Original Equipment Manufacturer (OEM)

Additional Net Income generated
= 100000*Selling Price – 100000*Cost per unit paid to OEM
= 100000*15 – 100000*14
= $100,000

Alternative 4: Do not accept the order from Big Box

Additional Net Income generated would be zero
Conclusions:
Part 1 & 2

After evaluating all the options we conclude that Clear Hear should accept the Big Box order and
should follow Alternative 2 (Utilize existing capacity of 70000 units and buy 30,000 units from
Original Equipment Manufacturer) as it would maximize profitability and revenue for the company
while minimizing the cost.



Part 3:
The total fixed cost would not be affected whether we accept the Big Box order. Adjustment of variable
cost have been shown under each of the alternatives above.

Part 4
Note: Nothing specifically has been given regarding how the costs (variable or fixed) are being
incurred so for part 4 we have to make some assumptions so to know how the cost can be reduced.
Some of the ways in which cost can be reduced
    1) If the demand is enough the company produce only one type of product thereby reducing the
       fixed cost related to other product type (but it should be taken care net profit it not reduced)
    2) If the company increase its production level it can re-negotiate the price with the suppliers.
    3) Company can implement better inventory management techniques such and Just in Time (JIT)
       or Economic order quantity (EOQ).

								
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