Costs & Values
San Juan Cell Phones
Marianela Tavarez Torres
University of Phoenix
ECO/561 Puerto Rico ??“ Economics
Prof. Adelaida Torres Dilan
October 20, 2010
In this scenario of San Juan Cell Phones we could appreciate the difference between three types of cell phones to be made their costs, values and price. These phones need to be reliable to the customers and meet their spectators but need to be economic in production in other to fit the customer??™s pocket. We will find a way to get their production ready and keep it as profitability as possible in order to secured the 100,000 cell phone order.
Maria Perez a business development specialist at San Juan Cell Phones as accepted an order of 100,000 cell phones from a major chain and she wants to take the order to cover the company excess capacity coming up in the next three months. In order to proceed with this order she needs to verify their production costs in order to know the best suitable price for the major chain (Big Box) and her company. When we speak about production we are talking about inputs to outputs, also we need to consider the technology available for using equipment, plant, materials, labor, etc… Any improvements made to better their equipment in technology will result in a new production function. First of all we need to consider the accurate cost of the product and carefully take in consideration what is done and what is not done, and then been careful in the decision that will be made because of their benefits and relative cost. In this case San Juan Cell Phones need to visualize their current cost for the Alpha model. See if there is any already in stock according to the reading they have an excess in capacity of 70,000 cell phones units over for the next three months in which only 30,000 will be need it in order to complete the order. If there were to decide to use the Alpha unit prototype and complete the order with that model they will incurred in something call replacement cost.
This means the cost of duplicating a product by using the current technology. This differs from the accurate cost because in accurate cost, the product is already made, in replacement cost they will have to use the same technology used before. Why because if a company holds electronics components in inventory such as cell phones, the relevant cost for pricing purposes is replacement cost. In this scenario we could also mention opportunity cost which means forgone value associated with current rather than next best used of an asset.
Because is a choice of alternatives in price at least as great as the resource??™s value. This is considered in the prototype made by Original Equipment Manufacturer (OEM) for the Alpha Unit. As an alternative to complete the order of 100,000 I will consider the prototype made by Original Equipment Manufacturer (OEM) cause they could come up with 100,000 units in a shorter time, the phone performance will be the same as the product made by San Juan Cell Phones and its cost will be less per unit than usual made by them.
Original Equipment Manufacturer could produce the order secured by Maria who works for San Juan Cell Phones placed by Big Box in lesser time, their cost per unit is $14.00, and Big Box will pay $15.00 per unit no more than that. Which will be an increase, a positive profit contribution for them This decision will benefit them; cause could be a possibility of getting bigger orders in the future. In this situation the decision made by the manager need to ensure that only those costs actually affected by the decision are take in consideration. This incremental cost can include implicit and explicit cost. In this case I do estimate that their contribution analysis which will estimate their selling price and direct (variable) costs will meet their expectations.
Managers sometimes know with certainty the outcomes that each possible course of action will produce but sometimes they don??™t. That is called risk; this is a chance that a person is willing to take in order to obtain a negative or positive reaction from a business decision. In this case since I decided to go with the cell phone made by Original Equipment Manufacturer (OEM) this type of equipment could have a probability risk. Which means that is possible that the event will occur and that an expected value is anticipated. Also an absolute risk is possible cause is an
Overall dispersion of possible payoffs. This kind of possibilities could happen because of the kind of product to be build. Relative Risk is another one possible that will depend if there are any returns that will affect the profit.
If it was my decision to choose which alternative to take I will still go with option of OEM because the product is almost similar as the one build by San Juan Cell Phones. Their production would be quicker, cost lower and profit higher. There is only a question to be answer would their performance and durability is the same or as good as the ones from San Juan Cell Phones. Well that??™s something they need to find out. In that case I would made a few and test them before completing the order, in that way the company??™s credibility would not be put in risk and if the product needs some adjustment they could be made ahead of time.
In this particular case San Juan Cell Phones had to make a choice of whether taking the order or not evaluating the options and taking chances. Something positive was that cost of production was lower than theirs, and the profit to be made was more than, if they were made at San Juan Cell Phones. But life is all about taking chances cause is the only way to know what could be done, and find out what mistakes to fix. Taking the order and using the option given by OEM was a risk probably because not been sure how reliable this product is could involve a lot of things but also could be a big hit.
Managerial Economics (Revised Edition) COPYRIGHT ?© 2000 Thomson Learning, Inc., by Mark Hirschey
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Marianela Tavarez Torres