Cost Scenario

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Opportunity Cost Scenario Summary

ClearHear is a manufacturer of cell phones, where Kendra Sherman works as a business development specialist. Kendra anxiously awaits her appointment with Lisa Norman, the production manager for ClearHear. Kendra has secured an order for 100,000 cell phones, virtually identical to ClearHear’s Alpha model which will support a promotion that a major chain, Big Box, is running with a telephone service provider. The delivery date is in 90 days. Lisa is interested, in part, because she has an excess capacity of 70,000 cell phone units over the next three months, and part of her bonus is based on running the factory at capacity. However, the larger part of her bonus is based on factory total profitability. Big Box, however, will not pay over $15 for each of the cell phones, which are based on the $20 per unit Alpha model, lessening Kendra’s enthusiasm.

ClearHear runs two production lines at their factory. The other produces the Beta model which has more features. It sells for $30 but also costs more to produce. Lisa knows that she could switch production of 30,000 units from the Beta model to Alpha to complete the order. However, just last week an Original Equipment Manufacturer (OEM), which has extensive experience manufacturing cell phones for other brands and has won several quality awards for its manufacturing processes, showed Lisa a prototype of the Alpha unit. The OEM sought to convince Lisa that, not only could they produce up to 100,000 units of Alpha on short notice, but the performance of the cell phone would be identical to ClearHear’s product. The price would be a nonnegotiable $14 per unit.

After the meeting Lisa reviewed the last month’s unit profitability report which revealed the following:

Table 1.

Unit Profitability Report
| |Alpha model |Beta model | |Price per...
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