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Cost Scenario - Case Study Example

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Cost Scenario

Balance 30,000 may be outsourced to the OEM at US$14. Here again, the variable cost has to be reduced to US$5. Lisa Morgan will forfeit the larger part of her bonus, but she will receive some bonus for running the factory at capacity.
ClearHear appears to be losing out due to underutilization of capacity. ClearHear must work on costing based on volumes so that they have clear prices to offer on voluminous orders like the present order.
There is maximum risk potential when the order is outsourced. The OEM has good track record on delivery and has won several quality awards for its manufacturing processes. However, once the order is outsourced to this OEM, the risk potential exists until the goods are delivered.
Internally too, there is risk potential due to decrease in the amount of variable cost. Nevertheless, due to the volume of the order, there is the possibility of reducing the variable cost without compromising quality.
In my opinion, Option 2 is the best alternative solution. This is the only option for ClearHear to get the job done through a reliable OEM at a cost it cannot manufacture the cell phones. The problem of acting against the company's statement of values exists in this option. ...
It would be better if the variable cost can be reduced further to US$4.
In option 2, the order is outsourced to an OEM. The OEM is reliable and has its own manufacturing facilities. The OEM is as good as ClearHear, or even better, where production is concerned.
Risk Analysis
There is maximum risk potential when the order is outsourced. The OEM has good track record on delivery and has won several quality awards for its manufacturing processes. However, once the order is outsourced to this OEM, the risk potential exists until the goods are delivered.
Internally too, there is risk potential due to decrease in the amount of variable cost. Nevertheless, due to the volume of the order, there is the possibility of reducing the variable cost without compromising quality.
Risk factor can happen through any unforeseen event, acts of God, contingencies, etc.
Recommendation of the best alternative solution
In my opinion, Option 2 is the best alternative solution. This is the only option for ClearHear to get the job done through a reliable OEM at a cost it cannot manufacture the cell phones. The problem of acting against the company's statement of values exists in this option. However, this has to be balanced against cutting down on variable costs and increasing risk of encountering loss in the event the variable cost cannot be brought down to US$5 (Opportunity Cost).
Outsourcing is valuable and valid and this option must be exercised when other options fail to satisfy the business needs. The business exists to make profits. It does not make sense to reject the order due to inability to hold on to company's statement of values. It is possible to keep the employees working by securing orders where the prices do not have to be slashed (Cost Concepts).
Conclusion
There is ...Show more

Summary

Take the order. Cut down the variable cost to US$5. Provide the cell phones at US$ 15. This leaves a profit of US$1. However, Lisa Normal will have to forgo the larger part of her bonus as she is not running at factory total profitability.
Lisa is not adhering to ClearHear's statement of values of 'Keeping the employees working'…
Author : ukassulke
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