Opportunity Cost Scenario Summary

Essay by maulwoofUniversity, Master'sA, July 2009

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ClearHear opportunity osverviewThe Opportunity Cost Scenario Summary details ClearHear, a cell phone manufacturer solicited for an order of 100,000 phones that are nearly identical to their Alpha model, one of the two models they produce. The second model produced is the Beta with additional features and costs more to produce than the Alpha while yielding a higher profit. This paper will explore the different possible costs associated with accepting the large order from Big Box (BB) and how that will affect overall profits while satisfying the firm's statement of values.

Alternative solutionsClearHear currently has an excess capacity of 70,000 phone units over the next three months and needs to decide if accepting the order from BB is the best business decision. Norman is the production manager and to accept the order, will have to redeploy 30,000 units of the Beta phone to the Alpha unit production line. The current price per unit (PPU) is $20 and BB is only willing to pay $15 per unit.

Recently approached by another OEM, Norman is considering an offer to adopt a method for production of the 100,000 units at a nonnegotiable PPU of $14. Norman's choices are production through redeployment of production lines, or the OEM offer at $14 per unit. Both choices achieve full capacity. A third alternative is to decline the order and continue at current levels of production.

Alternative analysis and evaluationFIGURE A.1. Accept BB order of 100,000 units and redeploy production of 30,000 Beta phones to make 30,000 Alpha phones.

Unit Profitability Report for ALPHA and BETA models.

Alpha modelBeta modelPrice per unit $20$30Variable cost per unit$8$12Fixed overhead $9$10Profits $3$8Contribution Analysis of Cell Phone Opportunity (K = 1000)Incremental Revenues [a] (PxQ) (20x100K)=$2000KLess Incremental Costs [b] (VC x Q) ($8x100K)=$800KLess Opportunity Costs [c] (Pr + FOH) x...