Clear Hear manufactures phones at its own facilities.
One of the goals of the managers of the company is to optimize production in order to take advantage of idle capacity. The company has an unused production capacity of 70,000 units. The firm has to decide whether or not to take an order of 100,000 units. The current bid is a price of $15 per unit. The firm has to consider the variable and fixed cost of producing the model. Clear Hear produces two types of phone models. The Alpha model is sold at $20. The profit margin on this model is 15% due to the fact that total cost equal $17 per unit. The Beta model is sold at $30 and it has a net market of 26.66%. Due to the fact that the production cost are higher than the price bid of the proposal the company cannot take the order under normal circumstances. To take the order the firm has to outsource the order to produce the phones at $14. The company would make a profit of $100,000 on the transaction.
In order to increase revenues Clear Hear can utilize several strategies. The firm can invest money in marketing in order to attract new customers. Advertising campaigns can ignite the demand of the product. Another way to improve revenues is by motivating the sales staff. Increasing commission incentives is a way to motivate the salespeople to produce more. A firm can increase its production capacity by investing in technology such as new machinery for the production line. Increasing the production capacity of the firm can enabled the company to shift its supply curve to the right. Greater production would enable the company to increase its revenues. Another simply solution to increase the demand for the product is to decrease the price of the phones. Due to the thin margin on the Alpha model the company has to be careful with its price decreases because it may hurt profitability. It is important to pay attention to the laws of diminishing return.