Explore BrainMass

Opportunity Cost Scenario

We are given a scenario and we must write a report with the following information:

o Identify alternative solutions to meet the end-state goals
o Analyze and evaluate the alternatives that you identified
o Perform risk analysis to identify potential risks and negative consequences of the alternative solutions
o Make a recommendation of the best alternative solution and explain how it best meets the desired end state

I have attached the scenario, but I am lost at how to proceed to find the required information or even compare the data. I know we should be using formulas and calculations, which I can do if I would know what formulas to use with the data given in the attached document. Help!!

ClearHear 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 ClearHear. Kendra has secured an order for 100,000 cell phones, virtually identical to ClearHear'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 three months, and part of her bonus is based on running the factory at capacity. However, the larger part of her bonus is based on factory total profitability. Big Box, however, will not pay over $15 for each of the cell phones, which are based on the $20 per unit Alpha model, lessening Kendra's enthusiasm.

ClearHear runs two production lines at their factory. The other produces the Beta model which has more features. It 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. However, just last week 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 Alpha on short notice, but the performance of the cell phone would be identical to ClearHear's product. The price would be a nonnegotiable $14 per unit.

After the meeting Lisa reviewed the last month's unit profitability report which revealed the following:

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
Note. All unit prices are in dollars.

Unfortunately, while 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 ClearHear's statement of values. It includes:

- 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


Solution Summary

This solution shows how to calculate the total incremental profit with the Big Box order and discusses the choice Kendra should make. This solution is provided in an attached Excel and Word document.