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Resource: University of Phoenix Material: San Juan Cell Phones
Read the San Juan Cell Phones material.
Consider whether to accept an order for a product that requires displacing another product from production. This decision employs contribution analysis, opportunity cost, and cost concepts. Base your decision on the University of Phoenix Material: San Juan Cell Phones, which provides a problem statement, opportunities, and end-state goals.
Write a report of no more than 1,050 words that explains the following in the context of the scenario:
• Identify and describe each of the costs of production at San Juan Cell Phones, and explain how they differ from one another.
• Identify alternative solutions to meet the end-state goals.
• Analyze and evaluate the alternatives that you identified, using incremental cost and contribution analysis.
• Perform risk analysis to identify potential risks and negative consequences of the alternative solutions.
• Make a recommendation of the best alternative solution and explain how it best meets the desired end state.
Include APA-style citations and references where appropriate.
San Juan Cell Phones Scenario Summary
San Juan Cell Phones is a manufacturer of cell phones in San Juan, Puerto Rico, where Maria Perez works as a business development specialist. Maria anxiously awaits her appointment with Lisa Norman, the production manager for San Juan Cell Phones. Maria has secured an order for 100,000 cell phones, virtually identical to San Juan Cell Phones’ 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 because prices are based on the $20 per unit Alpha model, lessening Maria’s enthusiasm.
San Juan Cell Phones runs two production lines at its factory. The other line 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 it produce up to 100,000 units of Alpha on short notice, but the performance of the cell phone would be identical to San Juan Cell Phones’ 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 unit 20 30
Variable cost per unit 8 12
Fixed overhead 9 10
Profits 3 8
Note. All unit prices are in dollars.
While unit profits were good and cost controls met factory standards, the underutilization of capacity deprived Lisa and the factory of profits that could have been earned on an additional 70,000 units. Maria wants to know if she should accept the order from Big Box.
As Lisa Norman thinks about how to proceed, she studies San Juan Cell Phones’ statement of values. It includes the following:
• Keep our employees working.
• Provide our customers with products on time and that reliably meet or exceed their expectations.
• Treat our business partners the same as we want to be treated.
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