March 23, 2010
Clear Hear, a cell phone manufacturing company produces two types of cell phones; their Alpha and Beta models. Kendra Sherman, Clear Hear’s business development manager, has secured an order of 100,000 units of cell phones from Big Box, a major chain. The phones will be used to run a promotion with a telephone service provider and Big Box has offered a non-negotiable price of $15 per phone based on the $20 price of Clear Hear’s Alpha model. The delivery date is in 90 days. Clear Hear currently has an excess capacity of 70,000 phones in the next three months. Therefore, Lisa Norman, Clear Hear’s production manager, is very interested in this deal albeit less enthusiastic about the price being offered by Big Box.
The company currently has a few options: The first option is to utilize their current resources to produce 70,000 units and therefore maximize their capacity. The other 30,000 units can be produced by switching some of the resources used in the production of the Beta model (which sells for $30 per unit) thereby completing the order. The second option the company has, is to accept an order of 100,000 units from an Original Equipment Manufacturer (OEM) which assures Lisa that not only are they able to complete the order on short notice, but that their product would perform identically to Clear Hear’s Alpha model. It is also important to note that this OEM has extensive experience in manufacturing cell phones and has won several quality awards for its manufacturing process (University of Phoenix, 2010, Week Four Supplement). The third option would be to use their own underutilized resources to produce 70,000 units and outsource the other 30,000 to the OEM.
Clear Hear is a monopolistic competitive firm. Therefore, it has a large number of competitors, a small percentage of the cell phone market and not much control over price. It however, has a product that is differentiated... [continues]
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