The main aim of most businesses is to generate maximum profits at minimum cost. However, many organizations face challenges in their operation. Reducing material, labor and other costs become essential if any profits need be achieved. To achieve ideal production levels, the production manager should be very careful while making decisions.
Revenues increment recommendation
Revenue is the resultant product of selling price and quantity. Clear Hear Company does not have the ability to meet the capacity required by Big Box company since they can only produce and sell 70,000 units out of 100,000 units.
If Kendra considers selling 70000 of Alpha, then revenue will be 15*70,000 = $1,050,000. The revenue generated from selling 30,000 units of Beta is 30000*14 = $420,000. However, Big Box wants to buy 100,000 units for $15 per handset, earning Clear Hear a revenue of 15*100000 = $1,500,000 which is relatively low.
OEM management team considered buying Alpha at $14 per handset. This will generate revenue of $1,400,000. If Clear Hear produced 100,000 units of Alpha, it would have earned total revenue of $1,500,000 from the sale. This is more than OEM business order by a margin of $1,000,000. As a result, it has recommended Clear Hear to sell 70,000 units of alpha and 30000 units of Beta so as to earn revenue of $14700.
Achieving ideal production level
The quantity of the manufactured products is dependent on the machineries being used. Companies with large and efficient plants can meet or exceed their production capacity. An ideal level of production considers the level of demand and supply (Khanna & Jain, 2010, pp. 16). Currently, the demand for Alpha mobile handsets exceeds the supply. As a result, the firm loses its operation since it is not able to exploit the market opportunity which would enable the firm maximize its sales revenue.
How fixed and variable costs should be adjusted to maximize profit
There are two main types of costs. These include the fixed and variable cost. Fixed costs remain unchanged irrespective of volume of activity within a given range.
Whether a company or business produces the units or, the expenses have to be met. The costs must be cleared after attaining a range of products or within the given time boundary. One example of fixed cost is rent. On the other hand, variable costs depend on the volume of activity. The higher the volume of production, the higher the variable costs. Examples of variable cost include water and electricity.
In such an instance, the cost would be fixed costs include rent, advertising, electricity bill, wages and telephone charge since they increase with every unit of mobile phone produced. To maximize profit, unnecessary costs incurred by the firm must be identified and eliminated. For example, idle and reluctant employees should go unpaid.
Identifying methods to reduce costs
Costs are incurred so as to earn revenues. However some costs are exorbitantly high such that they diminish the profit generated. There are a number of ways to reduce cost of operation which can be considered by the management team. Some of these are explained include:
Innovation: This entails finding new ways of doing business. Clear Hear can enter into telephony industry by providing what other rivals do not have. For example Clear Hear should partner with mobile retailers who have extensive distribution network.
Downsizing the workforce: This is reducing the number of workers in the organization. Unproductive and inactive workers may be retrenched so as to minimize on salaries and wages costs. This would have little effects on the total production. Reduction of the workforce is one of the several possible ways of improving profitability by reducing costs.
The benefits that accrue to downsizing workers include increases in productivity and sharpening of the management team’s focus to developing core competencies in the organization. In addition, it also reduces unnecessary layers of management hence decisions are made without any delays. With regard to Clear Hear, it can rid of some workers who are not adding value to the business
Restructuring; this involves removing the lines of business characterized with poor performance or departments which are incurring heavy losses. Administrative overhauls, improving the internal processes or even non- core operations sale are among the methods that can be involved in restructuring. It is a more effective method compared to downsizing the workforce. Clear Hear in the above example may choose to change the management in departments that are unproductive.
Minimizing customer care: It is vital for companies to pay attention to their customers in an effort to develop customer loyalty. However this does not mean that the organization should have many levels of customer care. Extensive levels of customer care increases expenses to the company and hence they must be reduced. Having a small team of customer representatives is an ideal method to reduce cost.
Training employees: With the ever changing technology, it is necessary to constantly impart the workers with the latest technology so that they become efficient in their work and minimize losses. Many companies provide introductory training or orientation for most of their new workers.
It may take the form of an older or senior employee assigned to show the new employee how to execute a given task. Failure to train the employees can have negative impacts on the firm and can negatively affect the firm. Inefficient employees may have negative effects on the firm’s competitive edge (Reh, 2010, para. 6).
Deploying skilled and competent personnel helps in increasing a firm’s production. This is because this kind of workers will perform faster and are keen to details.
This means that the resultant production will equate the level of skills on the employees. Training is therefore a prerequisite if a business is to increase its production level. Companies that are unable to recruit skilled personnel should make a budget for training programs on its employees (Barry, 2008, p. 65).
Obtaining high quality supplies from suppliers:
The procurement of supplies must be carefully done. An effective criterion should be integrated in selecting suppliers. This arises from the fact that there has been an increment in the number of counterfeit products which can harm the firm’s market reputation. For example, the firm should purchase vehicles from trustworthy dealers so as to avoid spending money on frequent servicing. Clear Hear can order spare parts for manufacturing its mobile phones from a certified and reliable dealer.
To reduce on the cost of running a business, one may also apply Total Quality Management (TQM) technique. TQM refers to an incorporated technique in which the management concentrates the level of an organization and its functions. The integration aims at achieving a continuous improvement in the quality of products or services.
Over the years, TQM has become very popular. It is a philosophy which advocates for doing the right thing in all activities and the engagements (Martin, 1993, pp.5). The overall goal of adopting TQM is to satisfy the company’s customers. If a product is produced and sold without any faults, there will be no cost of re-works and other costs related to poor quality. All the firm’s departments should integrate the concept of TQM in an effort to attain a high level of customer loyalty.
Conclusion
The assumptions of Clear Hear Company include:
- Employees work on full time basis and there is no redundancy.
- The firm does not practice Total Quality Management as evidenced by its inability to meet the expectation of Big Box.
- The firm is not fully utilizing its production capacity. As a result, it is only able to produce 70% of the expected 100,000 units of alpha handsets.
Reference List
Barry, K. (2008). 70+ Ways to Reduce Costs, Increase Productivity And Improve Customer Service. Richmond: F Curtis Barry and Co.
Khanna, O., & Jain, T. (2010). Business Economics. Delhi: VK publications.
Martin, L. (1993). Total Quality Management: The new managerial wave. Administration in social work. Vol. 27, Issue 2, pp. 23-45.
Reh, J. (2010). New employment training. Is it worth the investment? Retrieved from https://www.thebalancecareers.com/new-employee-training-is-it-worth-the-investment-2275305