Cost Scenario

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Cost Scenario

University of Phoenix
ECO 561PR
October 22, 2012
Professor Adelaida Torres Dilan

Cost Scenario

The San Juan Cell Phones Scenario Summary talk about this company that manufacture cell phones where Maria Perez, a business development specialist, secured an order of 100,000 units with this major chain, which is an opportunity to the company to increase their production and their profit. Cell phones are very important to the community these days for business, to keep in touch with the family or just to feel independent and secure. The first cell phone was created in 1973 by Martin Cooper of Motorola and others assistants and in 1984 they were available to the public. Today cell phones are more than just a mode of communication it is also a data search, an agenda, entertainment and also a Global Positioning System (GPS). The San Juan Cell Phones Company has two products, the Alpha model and the Beta Model, both with different prices, variable cost, fixed overhead and a profit (Table 1-1). Table 1-1 Unit Profitable Report

If we compare the cost of both products, the Beta model is more expensive but earns more profit for the company in compare with the Alpha model. On the other hand the Beta model costs more to produce, because is $5 over the Alpha model when you add the variable cost and fixed overhead. If we compare these two products in a production of 100,000 units the profit that we are going to have is presented in the Table 1-2. In this table we can see the differences in variable cost, fixed Table 1-2 Unit Comparison Profitable Report

overhead and profit between each product and for our surprise the differences in profit is the differences in variable cost plus fixed overhead. However the unit profits were good and the cost control, but this major chain, Big Box, is not going to pay San Juan Cell Phone unit price and for this reason they are looking for others alternatives. One of the different alternative solutions to meet the end-state goal is to buy the quantity of cell phones they need from the Original Equipment Manufacturer (OEM) who can meet the deadline for the items on time. Another is to switch part of the production of the Beta model to fabricate the Alpha model to finish the items on time (San Juan Cell Phone Scenario, 2009). Using incremental cost which is “the financial information needed for decision making” (Cliffs Notes, 2012) to analyze both alternatives it is important to take into consideration that if they buy the items from the OEM company, the profit is going to be less if they manufacture the phones. Also performing a contribution analysis, that according to Business Dictionary is “estimating the selling prices and the direct (variable) costs of a range of products, to compute the extent to which each unit sold will pay for indirect (fixed) costs and contribute to the net income”. Contribution analysis shows whether or not a firm is constrained by fixed or variable costs in achieving higher output, it is important to notice that the company has more profit when fabricating the Beta model compared with Alpha model.

In a company, it is also important to perform a risk analysis process to “determine the probability of a project's success or failure and to minimize future negative unforeseen effects”; for this Lisa need to see the advantage or disadvantage if she bought the cell phones to the OEM. Some of the potential risk are decrease the company production and consequently create an excess of personnel. The quality of the product can be under the San Juan Cell Phone standard and if the unit doesn’t satisfy the customer needs, our company is going to receive a bad promotion. In consequences of this they can lose others customer and decrease their sales and their profit; for this reason they need to evaluate first the OEM reputation which according to the scenario is excellent. This can affect at the same because...
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