Revenue, Cost Concepts, and Market Structure Proposal Ã¯Â¿Â½ PAGE \* MERGEFORMAT Ã¯Â¿Â½1Ã¯Â¿Â½
Clear Hear is a cell phone manufacturer that is looking to implement new methods to increase its revenue and profitability, along maximizing its production processes while abiding the corporate policies of the company. The company is known to provide products to customers in a timely manner, and have a respectable reputation in treating business partners fairly in the telecommunications industry. Dealing with thousand piece orders of cell phones with huge chain stores, like Big Box, the company has to determine fair prices to satisfy both ends of each of the companies. In the next couple of paragraphs, I will provide recommendations to the company for increasing revenue, achieving ideal production levels, and identify methods to reduce costs. Furthermore, I will determine how fixed and variable costs should be adjusted to maximize profits, and provide assumptions for the company and its values.
Clear Hear's Scenario
In the given scenario, Clear Hear has the opportunity to secure a 100,000 units order with one of the products that is similar to their alpha model. The company manufacturers two different cell phones; Alpha model and Beta Model. Kendra Sherman, business development specialist for Clear Hear, is discusses the deal with the production manager, Lisa Norman, in securing the deal with Big Box. Big Box is a major chain company that is running a telephone service provider promotion. However, Big Box is not willing to pay more than $15 for each of the units. According to the chart 1, Clear Hear's Alpha model is $20, which produces a $3 profit, and their Beta Model is $30, which produces an $8 profit (University of Phoenix, 2010).
Price per unit
Variable cost per unit
The deadline to provide these orders to Big Box is in three months, however, Lisa Norman has mentioned that Clear Hear's Alpha production line can only accommodate 70,000 pieces in 90 days. Clear Hear's respectable reputation is on the line of providing the cell phones to Big Box in a timely manner, along with putting to risk Kendra's commission. Failure of not completing the orders for Big Box can delay Lisa from attaining her incentive plan, which is based on running the factory, and resulting in a huge loss for Clear Hear.
Clear Hear's gross revenue opportunity for the Big Box order is $1.5 million dollars (100,000 x $15). Opportunity cost is defined as "the cost of passing up the next best choice when making a decision" (Investorwords.com, 2010). Knowing that Clear Hear's Alpha production line can accommodate 70,000 units, the remaining 30,000 units can be either transferred to the Beta production line to complete the order, or outsourced to an alternative manufacturer company that produces identical cell phones at fair prices. However, Big Box's nonnegotiable unit price of $15 results in a negative $2 dollars in profits for the Alpha model and a $1 dollar profit in an Alternative Manufacturer model (AM). Per the chart below I referred the fixed and variable costs as the Total Cost.
Price per unit
Based on the figures, the AM model allows Clear Hear to secure the Big Box order and assure the requested delivery date of 90 days. Like Clear Hear, the AM has experience in manufacturing cell phones and is known to offer quality products to customer as well as business affiliates. In addition, the AM alternative satisfies the Big Box requirements by providing the units in a timely manner and reliability that meets or exceeds their expectations. Clear Hear can also outsource more of the orders to AM; for instance, 30, 000 pieces can be produced at Clear Hear's Alpha line, and the 70,000 pieces can be allocated to AM. By Clear Hear outsourcing more orders, the company will be able to increase its production and deal with other potential companies and their requests. Furthermore, it will allow them to earn additional revenue of $10,000 per the chart below.
Alpha model (30K)
AM model (70K)
Clear Hear's best option would be for the company to outsource all 100,000 units to the AM because it satisfies the company's core values. The company's profit margin would be $100,000 with AM, compared to $10,000 with the Alpha production line (30K) and AM (70K). The chart below displays the option between sharing the production or outsourcing 100% of the production to AM.
Clear Hear & AM (30K & 70K)
With Clear Hear offering $15 per unit at the equilibrium price, the demand of the Alpha cell phone will increase; resulting in Clear Hear to increase its supply by either expanding its facilities or outsourcing their Alpha cell phones to meet the new market supply and demand. Clear Hear would probably receive a reasonable price if they were to outsource 100% of the cell phones to AM. Moreover, another alternative for Clear Hear would be to implement new changes to the Beta model because it yields a more profitable margin than the Alpha Model. However, the company must allocate one or both models to research and develop the most innovative product for consumers to inquire.
Clear Hear's 100,000 units deal with Big Box was an opportunity for the company to look into other alternatives in increasing revenue and production operation, along with identifying methods to reduce costs. Outsourcing was the most reasonable option for Clear Hear to satisfy its core values, especially the company's reputation, Kendra Sherman's incentive plan and commission. Furthermore, by outsourcing their production, it will leave more room for other deals and agreements, along with new innovative technology that can increase the revenue and profitability for Clear Hear and its employees.
University of Phoenix, (2010). Clear Hear Scenario. Retrieved September 11, 2010, from https://ecampus.phoenix.edu/classroom/ic/classroom.aspx
Investorwords.com, (2010). Opportunity Costs definition. Retrieved September 11, 2010, from http://www.investorwords.com/3470/opportunity_cost.html