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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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