Introduction
This is a case of outsourcing where contribution analysis is carried out. Outsourcing is the ordering of goods or labour from the outside the vendors manufacturing plant. In this case the company is intending to outsource the production of 30,000 Alpha Phones from Original Equipment Manufacturers rather then producing in-house. Apart from the quantitative analysis’s qualitative factors will also be considered as necessary (Horngren, Datar and foster, 2003 p. 378).
Alternative solution
From the given information about Clear Hear, the following alterative solutions to meet the end state goals resulted;
1. To make 70,000 and switch production of 30,000 units from Beta model to Alpha.
2. To make 70,000 and purchase 30,000 units from Original equipment manufacturers
3. Outsourcing all the 100,000 units.
Analyzing and evaluating the above alternative
i) To make 70,000 and switch production of 30,000 units from Beta model to Alpha: - In this case the manager will use the excess capacity (idle capacity) of 70,000 and switch production of Alpha. To produce the product, only the variable overheads will change but the fixed overheads will remain the same. This is because the expected variable costs will vary with the number of unities produced and the idle capacity available for use will make the fixed costs not to change (Goldratt and Cox 2004, P. 60-61). Therefore the manager can only choose to produce the product if the cost of producing is less than buying.
The contribution of the decision is as follows; Opportunity cost incremental
Revenue (900,000) 450,000
Variable cost (360,000) 270,000
Contribution (540,000) 180,000
Loss on switching product 180,000-540,000= (360,000)
70,000 contribution 840,000
Total contribution 480,000 ii) To make 70,000 and purchase 30,000 units from Original equipment manufacturers: - Here the manager is alternatively considering completing the supply of the order by outsourcing 30,000 units from Original equipment Manufacturer. The product from Original equipment Manufacturer is an alternative product which has the same characteristics as Alpha.. This can be evaluated as: Per unit total (30,000)
Selling price 15 450,000
Purchase price 14 420,000
Contribution 1 30,000
70000 units contribution 12 840,000
Total contribution 870,000 iii) Fully outsourcing: - The production manager can alternatively buy the product from a different manufacturer to sell to the customer (Big Box). If Lisa decides to purchase Alpha from OEM, she should consider different factors like the suppliers’ reputation for convenience and quality, the design of the product, product reliability and the cost (Horngren, Datar and foster, 2003 p. 373-379). Also the associated increase in revenues should be taken into account. This decision can be illustrated as: Per unit total (100,000)
Selling price 15 1,500,000
Purchase price 14 1,400,000
Contribution 1 100,000
The best solution is to make 70,000 and purchase 30,000 units from Original equipment manufacturers as it has higher contribution.
Potential risks and negative consequences of the alternatives
In the case where the manager is deciding whether to make or buy Alpha product, the following risks are associated. This may influence the customers to buy other alternatives in the market which are cheaper hence reduce market share for Alpha product. Secondly, the product outsourced from outside may be of a good quality as compared to our product forcing the customer to prefer buying directly and reject Alpha (Horngren, Datar and foster, 2003 p. 369-373).
If the manager chooses to make Alpha at the expense of Beta model, then he considers the following risks. To begin with, Clear Hear may loose its market share if the customers are not supplied on time of the products making the buyers to switch to other suppliers in the market. Secondly there may be a shortage in demand of Beta model products lowering the revenues for the company.
If Lisa decides to outsource fully from OEM, then the risks which she should be aware of are; the product purchased can be of bad quality making the customer to consider other manufacturers as a result loose the order. Secondly, the company may create a competitor for Alpha brand and lastly the company (OEM) may not be reliable in terms of delivery schedules making the customer to loose faith in the company.
Recommendations
From the above, the best possible alternative solution to Lisa is to make 70,000 and buy 30,000 models from Original Equipment Manufacturers. This is because the available excess capacity will be put into use meaning that no opportunity cost will be lost. In addition the quality of the product will be easily maintained as a larger number of products will be produced by Clear Hear itself (Drury, 2000, P. 273). The best alternative cannot only be based on calculations but also on qualitative factors like quality of product, keeping employees engaged and no setbacks to customers (Horngren, Datar and foster, 2003 p. 378-380).

Reference List
Drury, C. (2000). Management and cost Accounting. London: Business press Thomson Learning.
Goldratt, E & Cox J. (2004). The Goal - A Process of Ongoing Improvement. MA: North River Press Publishing Corporation P:60,61.
Horngren, C., Datar S., & foster G (2003). Cost accounting: a managerial emphasis. New York: Prentice Hall Page 375-377