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Revenue, Cost Concepts, And Market Structure

955 words - 4 pages

Running head: REVENUE, COST CONCEPTS, AND MARKET STRUCTURE

Revenue, Cost Concepts, and Market Structure Proposal
ECO/561
April 26, 2010

Revenue, Cost Concepts, and Market Structure Proposal
Clear Hear scenario
Clear Hear Corporation is a cell phone manufacturing company (University Of Phoenix, 2008). The company produces two kinds of cell phones for market: the Alpha model and the Beta model. Kendra Sherman is a business development specialist; she has secured an order from a large chain company called Big Box for 100,000 cell phones. Big Box needs the phones for a service promotion the company is running with a telephone service provider. The cell phones ordered are ...view middle of the document...

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 production equal or below $15. Therefore, it is not advisable to operate at full capacity by sustaining losses. In the end, if the company is able to bring down costs, such opportunities can be tapped by utilizing excess in-house capabilities.
The second alternative of outsourcing the complete production of 100,000 units to OEM is surely attractive as company will be able to fulfill the order and make a profit of $1/unit or $100,000 in profits without disturbing its existing manufacturing system. However, one of the major concerns in this scenario will be quality issue with the OEM. Although OEM maintains a good reputation, company will need to keep a strict control over the product quality delivered by the OEM to ensure that the product delivered to the customer does not jeopardize company's reputation. Although this alternative puts a question mark on the values of the company to keep their employees working, it is indeed beneficial for the stakeholders of the organization as it is resulting in excess profits. However, we have to assume that the OEM adheres to same set of quality standards as the company has been adhering to and delivers excellent products.
The third alternative of running the plant at full capacity and fulfilling the requirement of excess demand of 30,000 units by transferring capacity from beta model does not make economic sense as the opportunity cost of such switching of models is too high. Beta model is highly profitable and it does not make sense for the company to switch production from a highly profitable model to a...

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