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Evaluating alternatives

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In this scenario, let us start with evaluating various alternatives in front of the company. Lisa and Kendra have three options. First option is to accept the order and manufacture 70,000 units by utilizing the excess capacity and outsource 30,000 units to the OEM.

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In this scenario, let us start with evaluating various alternatives in front of the company. Lisa and Kendra have three options. First option is to accept the order and manufacture 70,000 units by utilizing the excess capacity and outsource 30,000 units to the OEM. The second option is to completely outsource the manufacturing of 100,000 units to the OEM. The third option is to completely manufacture 100,000 units inhouse by utilizing spare capacity as well as switching production capacity of the beta model to the Alpha model.

Now, let's evaluate the pros and cons of each of these alternatives.

The first alternative of utilizing spare capacity of 70,000 units and outsourcing remaining requirement to OEM does not suit the company as recent cost data shows that company's inhouse cost for producing such units is $17/unit, which is above the $15 pricing offered by the buyer. Hence, it does not make economic sense for the company to operate the unit at a loss. In such short run, it is nearly impossible for the company to bring down the cost of ...

Solution provided by:
Sheetal Jain, PGDM
Education
  • BComm, University of Delhi
  • Post Graduate Diploma in Management (Equivalent to MBA), All India Management Association
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