This article is part of the from tax and legal expert Mark J. Kohler. Over the years, I’ve discovered there is a lot of misinformation out there regarding what is or….
Costs of Production at San Juan Cell Phones
Costs of production at San Juan Cell Phones This is clearly a challenge for Lisa. If Lisa decides to take the order she will have the opportunity to run the factory to capacity over the next three months and fulfill a Company Value by keeping employees working, in addition, she will have a bonus check on her pocket. This will be the optimal decision if the factory had excess capacity of 100,000 and Big Box asking price remains $20 per unit.
Let’s say Lisa decides to use the Beta Model Line to make the additional 30,000 units, since we are short on information let’s assume that because of the production line change the factory will be 30,000 short on Beta Models. Based on table 1 (Unit Profitability Report) and if units are sold accordingly then San Juan Cell Phones will generate a profit of $90,000 by manufacturing and selling the Alpha model vs. 240,000 profit generated by manufacturing and selling the Beta model. San Juan Cell Phones will risk $150,000 in profit with the production line change alternative. If the company decides to honor the asking price then San Juan Cell Phones will generate losses. If phones are sold at $15 each and variable cost per unit remains same based on table 1 (Unit Profitability Report) then the company will lose $2 per unit making it a $200,000 or a $140,000 deficit.
Variable cost will have to decrease $2+ in order to gain some profit. Another alternative will be to hire the OEM to manufacture the entire order. This alternative will be the most profitable one with a $100,000 profit gain without literary doing anything. Mrs. Norman needs to realize that gains may not be always in the shape of money and that she needs to comply with company values in order to maintain integrity which is very important in business today.
It is clear that a deal with a major chain like Big Box will bring a good advertisement for the company which eventually will bring more buyers and that will bring more profit to the company, so no matter what happens the company will benefit from this order if production is handled correctly. Keeping that in mind, ordering the OEM to manufacture the entire order is the most attractive option in terms of money but will not run the factory at capacity and will not keep the employees working which is one of the company’s values.
In my opinion there is a happy medium to the situation that could bring some profit will keep the employees working and will comply with the order in time. Dividing the production between San Juan Cell Phones and the OEM will fulfilled most of Mrs. Norman needs. Buy hiring the OEM to manufacture 2/3 of the order will make it even with profit of the OEM deal paying for the losses made by producing the Alpha models within the company’s facility and selling it at the requested price ($14).
Since profits were good and cost control met standards this will be an alternative to Lisa because production will increase 33,334 units decreasing the excess capacity to 36,667. In other words factory will be producing closer to its capacity, will keep employees working and will provide the costumers a quality product on time. If Lisa wants to gain profit from the deal then she needs to decide how many more units the OEM needs to manufacture with little impact on factory productivity, employment and of course her bonus.