Grad Assignment 2.docx

Grad Assignment 2.docx - Northern Optical Solution To...

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Northern Optical Solution To operate in a profitable state, you as managers at Northern Optical should not sell the lens below $15 for the special order. The additional fixed expense adds to the production cost for the order and needs to be accounted for when determining a price point. Selling the lens at exactly $15 will allow you to break-even – meaning they will cover all costs incurred but make no additional profit. Below I have constructed a visual to depict how I could determine the $15 selling price. From this chart, you can see the only costs that need to be included to produce the X-lens’ are the variable production cost and the fixed cost of the imprinting machine that will need to be purchased to fulfill the order. The fixed production costs are not included because you will still incur these costs with normal production, regardless of if the special order is fulfilled or not. The variable selling cost is also not included because no additional expenses will be necessary to make the sale since it will be prearranged. The variable production cost and the special machine the only costs necessary to evaluate, making them both relevant costs. Additional Considerations Aside from the cost perspective, there are many other factors that you should consider before accepting this special order that may affect the business altogether. You should first consider if your production facilities have adequate capacity to fulfill the order. This includes sufficient staffing to work on this order in addition to normal operations plus the staff’s ability to complete the order in a reasonable timeframe. Management must weigh in on these production factors, not just the financial aspects to make an appropriate decision. You and the management team should forecast the expected demand for the period of when the special order will be produced to gain a more accurate perspective regarding the company’s production limits. You should also consider if the special-order price point could be an issue for other loyal customers if they were to become aware of the low price and complain not receiving any discount on their order. This could cause the Northern Optical to lose customers or force you to lower the selling price of the product which will result in a loss of profitability. Another factor that may be relevant is the reliability and reputation of the customer for the special order. The company should consider if they believe they will be paid in a timely manner, if the customer is easy to work with and if their own reputation may be affected by associating with this customer.
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