Cost_Scenario

Cost Scenario Clay ECO/561 April 30, 2009 In the Opportunity Cost Scenario Summary there is a challenge that involves the decision making of whether to accept the order of a product, in which it might require to not use another product. This is a decision that would have to be based on opportunity cost, contribution analysis and cost concepts. ClearHear is the manufacturer of cell phones that has some challenges with the product. There are many decisions that are in place whether it is for Kendra Sherman who is the business development specialist that thrives off of making her extra income from bonuses as she runs the factory at full capacity and at factory total profitability. There will be consideration to analyze, identify and evaluate any alternatives that would help make the company benefit for the long haul. There are two models of the production line that ClearHear has, which are Alpha and Beta model. These models are different in price per unit, variable cost per unit, fixed overhead and profits. Kendra has secured an order of 100,000 cell phones. The Alpha model is an identical product of ClearHear that can be supported by a major chain, Big Box. Big Box will not pay more than $15.00 for each cell phone. The Alpha model is the closer of the two models. When looking at the Beta model everything is much higher in price, variable cost, fixed overhead and profits. When looking at any contribution analysis one must look at the difference between the fixed cost and the variable cost. This allows the managerial decision making and problem solving to be useful. What should be looked at in this would be the sales of the product, the cost of goods sold, variable operating expenses and marketing expenses. These items are key values to analyze the contribution factor. The product price, variable cost and fixed overhead for the Alpha model show lower than the Beta model. While the cost of a good or service often is thought of in monetary terms, the opportunity cost of a decision is based on what must be given up which can be the next best alternative as a result in the decision making process. When there is a choice between two or more options it will show an opportunity cost (http://www.netmba.com). Opportunity cost is very useful especially when you are evaluating the cost and any benefits of choice. In this scenario there is a choice that has to be made in which two options to choose from to give them an opportunity cost. Whichever product model that is not chosen will be the opportunity cost. This just tells you what opportunities presented itself for the cost of the product that was selected as oppose to the one that was not selected. Some ways to implement any cost concepts would be to look at increasing revenues by the decrease of expense while maintaining the revenues and improve productivity. The cost concepts identify cost reduction opportunities in the business overheads. This is done by allowing the company focus on some areas of the routine business expenditure that seems to get neglected. Many times savings are identified and the costs are reduced in a variety of areas. When these things are evaluated and implemented the cost concepts gives a full report that highlights the various cost reduction opportunities. What will be implemented once there is a satisfactory with any recommendations, implementation for savings will then exist. This will result in a long term savings, which will definitely benefit the company for many years. There are some potential risks if they are to use the Beta model because of the price of it and it is a significant difference in the amount ($15.00) that Big Box wants to pay or even the nonnegotiable price ($14.00) that was made. The risk will put the company in jeopardy of not selling as much, getting a profit of any kind and seem like in the long run it could make a negative impact. The best factor is to make sure that there is employment continuously, provide a product that will have a demand for that will keep the customers satisfied and happy. This also will show the reliability on the company product and give some high expectations that can exceed the customers’ choice. The price for the phones per unit is comfortable prices that will help the company generate profits that would help the company to last for duration. When looking at the product Alpha model, it would be good business practice to use the Alpha model because of the units that can be produced (100,000) plus they have an excess capacity of 70,000 cell phone units which will spread through out the 90 day period. With this there should be the price of $14 per unit which will help increase the profits, keep the fixed overhead and variable cost at comfortable number that would not put a strain or hurt any of the profits made. The contribution analysis, opportunity cost, and cost concepts are key areas that need to be analyzed and evaluate to see if there are any other alternatives. This helps to prevent the potential risk factors that can create negative consequences of any alternative solutions. Reference http://www.netmba.com, Retrieved on 4-30-2009