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Linda_us, Finance, Accounts & Homework Tutor
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Provide answers to the following questions based on the scenario

Resolved Question:

Provide answers to the following questions based on the scenario below for 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 uni 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.
Submitted: 3 years ago.
Category: Homework
Expert:  Linda_us replied 3 years ago.
HI Customer

I can help you with this question. Please let me know your deadline.

Regards

Linda
Customer: replied 3 years ago.
I need the information by Sunday noon. Thank you for your quick response.
Expert:  Linda_us replied 3 years ago.
ok I will provide the solution by that time or may be sooner.
Customer: replied 3 years ago.

Take your time. I am working tomorrow and won't be back in touch til tomorrow evening. After I receive your answer I have to write a 1050-1500 word essay on the 4 points that you respond to so I appreciate all the information supporting your answers that you can provide.

Expert:  Linda_us replied 3 years ago.
Hi Customer

Please Click here for Solution

Please note that I get credit for my work only when you click accept.

If you like my work In future you can request me by writing "FOR LINDA" in front of your post.

Let me know if you need any further explanation or clarification.

Regards

Linda
Customer: replied 3 years ago.

I do not understand your solutions:

 

When you determined the revenue in each solution, you only subtracted the variable cost (copy of your example:

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)

 

The table on the scenario showing the unit profitability report states:

 

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

 

So, how can you show the profits of the 100,000 units above in your solution without subtracting fixed cost and variable costs?

 

Please clarify so that I understand your solutions.

Expert:  Linda_us replied 3 years ago.
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Linda_us, Finance, Accounts & Homework Tutor
Category: Homework
Satisfied Customers: 7064
Experience: Post Graduate Diploma in Management (MBA)
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