COST CONCEPTS AND PROFIT MAXIMIZATION/CELLUCLEAR WIRLESS GOES GLOBAL - Essay Example

However it should be noted that the transactions in the case are international transactions, there are implications of conducting businesses across international borders. One of the most common costs in international trade is the duties that are levied by the governments, these must be incorporated in the decision making process. The organizations in question that relate to the options discussed below in the report are Big Box located in Pakistan and OEM located in China. Big Box is a customer of Celluclear who has currently requisitioned for an order of 100,000 units of mobile phones that are similar to the current model Alpha of Celluclear.

OEM is a manufacturer of mobile phones that has requested Celluclear to provide them with a sub contract to produce the units for Celluclear. Pakistan has had a strong increase in the imports of their cell phones in the last couple of years, from November 2009 to November 2010 there has been an increase of around 213%, $13.869 million to $43.416, this huge increased have proved the increasing demand in the mobile phone industry in Pakistan (Pakistan Today) Celluclear Wireless has three available options; these will be discussed shortly in the report.

However there are opportunity costs that are affiliated with the available options. Opportunity costs are described as the cost of choosing an option over the other, in simple words it is the revenue lost from one option as a result of choosing another (Henderson) Insurance is one of the strongest tools of risk management, it is considered as a highly practical activity that can be quite helpful to the organization in disastrous situations, it is described as a contract between two parties in which one takes on the risks of another in exchange of a consideration and promises to indemnify the insured in case of an event that has an uncertainty involved, and the accident should prove to have negative affects for the insured.

These costs have been ignored in the calculations (Appuonline). Other factors to be considered by Celluclear Wireless are time constraints and regulations prevailing in the countries of the proposed plans. These factors should be considered during the decision making process of international trade. Celluclear has three options available to them; these will be discussed individually in the report that follows. Option 1 The first option available to Celluclear is to produce all the required units in their own facility.

The summarized data for the budgeted contribution from this option is:- $ Revenue ($15 * 100,000) 1,500,000 Costs: Variable Costs ($8 * 100,000) (800,000) Contribution from Sales 700,000 Contribution Lost from Beta ($18 * 30,000) (540,000) Incremental Contribution 160,000 Note: It should be noted that the fixed costs are always ignored in the calculations involved in the decision making process, the main reason is the fact that fixed costs are not dependant on the product or the capacity of production, they are fixed and they have to be paid regardless of the fact that there is a presence of spare capacity or not.

In order to produce 100,000 unite in house, Celluclear will have to cut down the production of their beta model by 30,000 units, and this will result in an opportunity cost resulting from the revenue lost from the sales of 30,000 units. This cost has been presented in the calculat