Introduction
Clear Hear Company manufactures cell phones. The two most common phones used are the Alpha model and Beta Model. Kendra, the organization development specialist, has secured an order of 100,000 phones that are similar to the Big Box Alpha model.
Nevertheless, Big Box is not willing to pay over $15 per phone, which they require for promotion with a telephone service provider. Ordinarily, the Alpha model retails at a price of $20 per unit. Clear Hear company have the option of outsourcing the production to OEM at a nonnegotiable price of $14 with assured similar quality of products.
The following paper will analyzes Clear Hear Company scenario and make recommendations on what strategies the company should take. The recommendations will include how to maximize profits, illustrate the production levels and reduction of costs.
In addition, the recommendation should be in line with the corporate core values, which keep staff working, provide reliable products and in good time, and lastly treat business partners appropriately.
Increasing revenue
Since the company has the goal of increasing its revenue and hence profits, the company should accept the order and seek profitable ways of meeting it. Considering that profit equals total revenue less total cost, therefore, for maximum profit, the company needs to increase revenue and lower its costs (Mankiw, 2008).
Available options
The production manager has three options of meeting the Big Box order: firstly, by producing “the 70,000 phones through utilizing the facility’s excess capacity, and outsourcing the remainder to the Original Equipment Manufacturer (OEM)” (Thukaram, 2007).
Alternatively, the company can exclusively outsource the production order or decide to produce the entire order on its own, and may as well opt to produce the Alpha model in place of Beta model.
Evaluation
The company can supply the 70,000 units of alpha and outsource the remaining 30,000 units of cell phones. By outsourcing, the company will attain additional profits without altering the production structure. By not lowering of Beta model cell phones, the firm retains its market for the product and the associated profits.
One limitation of this option is that the firm’s production cost of the Alpha model is $17 while the buyer is offering $15 as the buying price; this affects the profitability of 70,000 units produced in Clear Hear. However, the option is in line with corporate core values. The contribution margin of the 70,000 cell phones per unit is $15- $17= $-2; hence, profit is $-11, which is a huge loss per unit product (Thukaram, 2007).
This option should not be used if the firm cannot bring down the fixed and variable costs of production. Quality may not be consistent due to production being done in different firms with different structures and strategies.
The second option of outsourcing is that the whole production does not alter the normal production; hence, it does not contravene the company’s core value of keeping its staff working. However, there are risks of substandard products, which can ruin the company’s future market. Clear Hear must maintain constant evaluation to ensure quality standards are not compromised.
Nevertheless, OEM can assist in completing the production in good time. The cost of production per unit is $14, while the buyers are not willing pay over $15 per unit. The contribution margin per unit is $15-$14=$1, hence the profit is $1 per unit, as there is no fixed overhead cost (Thukaram, 2007).
The firm is bound to make $100,000 in profit from the order. At the same time, Clear Hear makes profit from the normal production from Alpha and Beta models. In addition, the underutilization of capacity of the company deprives the firm of profits.
The last method of producing the whole order in-house will be in line with core values. However, on evaluation as a method of increasing revenue, the method falls short. To satisfy the whole order the production manager has to cut production of 30,000 units of Beta model. The company loss $5 in profit for each unit of Beta model not produced, which is a high opportunity cost.
Beta model has higher contribution margin and reduction of its volume production, hence sales lower profitability (Jackson, Sawyers, Jenkins, 2008). Further, the production cost of Alpha model is $17, which is more than the $15 buying price being offered, resulting to loss.
Improving production levels
To improve production levels in Clear Hear, proper management of resources is essential. The human capital should be properly utilized and managed, through properly equipping, training and motivation.
With high levels of production, the firm benefits from economies of scale, while variable cost of producing large volume of goods is lower. On the other hand, technology improvement will lead to high productions, at lower costs per unit and higher quality; automated production lines reduce labor cost. Finally, the firm can restructure to facilitate higher production (Madura, 2006,).
Maximizing profits
By increasing contribution, the total estimated contribution is more than the fixed overhead cost and leads to higher profit. The contribution per unit is increased by bringing down the total cost of production through lowering variable cost. Variable cost is lowered by getting cheaper supplies, or the labor costs. Another way to maximize profits is through advertising their products aggressively.
Beta model has higher profit per unit; hence, increasing the market of the product would increase the profits. Finally, providing sales incentives that draw more consumers to their products is essential, i.e. reliable after-sale services (Jackson, Sawyers, Jenkins, 2008).
Recommendations
The recommendations discussed above are crucial for Clear Hear Company to obtain sustainable growth and profitability in the present and future. The best recommendation is based on profit generated, risks involved, and costs of production and additional benefit of operation of the plant at full capacity.
The production manager should accept the order from Big Box and outsource to OEM. The organization will obtain $100,000 profit plus usual profits from its normal production. In this case, Clear hear must ensure it keeps its staff working on the normal production of the Alpha and Beta phones, while at the same time gaining from outsourcing.
Here, cost of operation will be eliminated, as the organization will not need to hire extra staff or invest in equipment just for the single order. Evaluating the quality standards will give the organization the ability to save money. This is mainly because there will be minimal wastage, while quality products will build customer confidence, thus enhancing the chances of the organization to increase its market share.
Generally, quality results from efficiency in processes, thus the organization will save on amount of inputs, labour usage per unit produced, and machine running time per unit produced. OEM cost of producing cells that are similar to Alpha model is $14, while Clear Hear spends $17 for similar product. By doing so, Clear Hear may be able to reduce the overhead cost of producing the Alpha and Beta models.
The collaboration assists the company with learning opportunity so as, in future, it can handle such orders hence benefit from larger profits and utilization of their factories to full capacity.
Measures to mitigate the risks involved should be but in place. These measures include forming a quality control panel comprising members from both companies to ensure quality assurance.
To achieve ideal production levels, the organization should improve or advance the production technology. In addition, human capital may require training and motivation. Moreover, to lower cost of production the firm can benefit from economies of scale. Some methods of reducing costs are improving efficiency and productivity or reducing the number of employees.
Efficiency is attained from proper planning, evaluation and implementation plus well trained work force. In addition cost can be cut by avoiding wastage, use total quality control kit ensure the firm gets quality supplies for production.
Incorporating proper marketing techniques will help the organization to increase its revenues. When the company builds a strong brand of its products, it will have sustainable revenue. Importantly, the firm must differentiate its products with other products in the market. Subsequently, production of quality product to the customers and proper after sale services will result to increased revenue.
Fixed and variable costs should be adjusted to improve profitability, contribution determine the amount of profit per unit. Contribution is lowered by reducing total cost (fixed and variable). Variable cost can be lowered by obtaining cheaper raw materials while fixed cost can be lowered by economies of scale or production advancement.
Assumptions
When the company outsources the whole order, the company financial capability will allow the company to continue its normal production and obtain market for the products produced. Other market forces will not affect the prices of the phones or raw materials used in this proposal for the particular duration.
References
Jackson, S., Sawyers, R. and Jenkins, J. (2008). Managerial Accounting: A Focus on Ethical Decision Making. OH: Cengage Learning. Web.
Madura, J. (2006). Introduction to Business. Ontario: Cengage learning. Web.
Mankiw, N. (2008). Principles of Economics. OH: Cengage Learning. Web.
Thukaram, R. (2007). Management Accounting. New Delhi: New Age International. Web.