ECO 561 Individual Assignment: Revenue, Cost Concepts, and Market Structure Proposal - Clear Hear Scenario

ECO 561

Axia College of University of Phoenix (UoP)

ECONOMICS

Clear Hear Scenario

Week Four 4

3. Individual Assignment: Revenue, Cost Concepts, and Market Structure Proposal
• Resources: Will Bury, Clear Hear, or Thomas Money Service scenarios located on your student Web site.
• Select from the Will Bury, Clear Hear, or Thomas Money Service scenarios located on your student Web site for this assignment.
• Create a 1,050- to 1,400-word business proposal in which you provide recommendations to the company for increasing revenue for the company, achieve ideal production levels, determine how fixed and variable costs should be adjusted to maximize profit, and identify methods to reduce costs.
• Describe your process to make recommendations.
• Include economic concepts to provide support for recommendations.
• Answer the question: What assumptions did you make about the organization and its values?

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ECO561
Week 4
Clear Hear Scenario

Clear Hear 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 Clear Hear. Kendra has secured an order for 100,000 cell phones that are nearly identical to Clear Hear’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 3 months, and part of her bonus is based on running the factory at capacity. The larger part of her bonus, however, is based on factory total profitability. Big Box, however, will not pay more than $15 for each of the cell phones, which are based on the $20 per unit Alpha model, lessening Kendra’s enthusiasm.

Clear Hear runs two production lines at its factory. The other line produces the Beta model, which has more features. The Beta model 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. Just last week, however, 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 the Alpha on short notice, but the performance of the cell phone would be identical to Clear Hear’s product. The price would be a nonnegotiable $14 per unit.

After the meeting, Lisa reviewed the last month’s unit profitability report that 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.

Unfortunately, although 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. Kendra wants to know if she should accept the order from Big Box.

As Lisa Norman thinks about how to proceed, she studies Clear Hear’s statement of values. Clear Hear’s values include 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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FIN 200: Assignment Workbook Week 7 Solution

FIN 200

Axia College of University of Phoenix (UoP)

Introduction to Finance: Harvesting the Money Tree

Finance 200 Assignment Workbook Week 7 Solution

Week 7 Assignment: Loan Scenarios

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The Niara Corporation is negotiating a loan from Manhattan Bank and Trust. The financial details are as follows:

Niara needs to borrow: $ 600,000
Bank Rate 7.00%
Compensating Balance 12%
Term (yrs) 1

Or

Bank Rate 9.00%
Fees $ 1 2,000
Term (yrs) 1

In either case the rate on the loan is floating (changes as the prime interest rate changes).

a. Which loan carries the lower effective rate? Consider fees to be the equivalent of other interest.
b. If the loan with a compensating balance requirement were to be paid off in 12 monthly payments, what would the effective rate be? (Principal equals amount borrowed minus the compensating balance.)
c. Assume the proceeds from the loan with the compensating balance requirement will be used to take cash discounts.
Disregard part b about installment payments and use the loan cost from part a.
If the terms of the cash discount are 1.5/10, net 50, should the firm borrow the funds to take the discount?
d. Assume the firm actually takes 80 days to pay its bills and would continue to do so in the future if it did not take the cash discount. Should the company take the cash discount?
e. Because the interest rate on the loans is floating, it can go up as interest rates go up. Assume that the
prime rate goes up by 2 percent and the quoted rate on the loan goes up the same amount.
What would then be the effective rate on the loan with compensating balances?
Convert the interest to dollars as the first step in your calculation.
f. In order to hedge against the possible rate increase described in part e, the The Niara Corporation decides to hedge its position in the futures market. Assume it sells $500,000 worth of 12‐month futures contracts on Treasury bonds.
One year later, interest rates go up 2 percent across the board and the Treasury bond futures have gone down to $485,000.
Has the firm effectively hedged the 2 percent increase in interest rates on the bank loan as described in part e?
Determine the answer in dollar amounts.
You must show your work to get credit.

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