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Economics – Puerto Rico Essay

In this paper will identify, describe and production costs of the Company San Juan Cell Phones compares. In turn, the potential risks are identified in making management decisions. In addition, will analyze and assess what are the best ways to prevent negative consequences for the company. The term cost refers to the amount or representing a product or service according to investment in material, labor; training and time that you need to develop it. As you can see, the term is characteristic and central to economics as it is the point at which any part of trade or economic relationship between two parties. The cost is to be paid by those who want to receive a product or service to have it in his possession or under his control. Today, the cost of a product or service is expressed in most situations in terms of money or capital (which may itself vary currency according to the region or area in which the exchange takes place). However, in antiquity and long, humanity carried on their trade and economic exchanges through the delivery of other items such as spices. The cost of the products is then provided to the equivalent cost for a given quantity of spice.

Economic Costs

According to McConnell & Brue (2008), Economic costs include all payments that must be received by resource owners to ensure a continued supply of needed resources to a particular line of production. Economic costs include explicit costs, which flow to resources owned and supplied by others, and implicit costs, which are payments for the use of self-owned and self-employed resources. One implicit cost is a normal profit to the entrepreneur. Economic profit occurs when total revenue exceeds total cost (= explicit costs + implicit costs, including a normal profit). Differentiate between short-run costs and long run depending on use of whether variable or fixed productive factors. In Short-run costs: have fixed and variable inputs. Therefore, variable and fixed costs will be. Within the short-run costs are: Total Cost is the market value of all inputs used to produce a product. It has 2 components: fixed and variable costs: (1) is determined and unchanging value that is independent of production volume, are those costs always exist e.g. rent, electricity, etc. (2)

A Variable cost is a cost that is incurred depending on the volume of production, human cost (work) and commodities. (3) The marginal cost is the change experienced by the total cost when an additional unit increases production. Grows in contrast to the marginal productivity sense, if it grows, the marginal cost decreases. In Long-run costs: there are only variable costs. In the long run, firms have no fixed costs are all variables that the factors of production are thus the total cost, which is equal to the variable costs. The curves in the long-run costs, they say to each output, with the lowest cost that can be obtained, assuming all inputs vary.

The curve means short-run costs will be tangent to the long-run average costs. The total long-run cost is equal to all the variable costs of the company. Some of the reasons why the average total cost curve to be increasing, stable or declining: (1) the means and long-run marginal costs, like a “u” because it produces income production. (2) When yields are constant output grows proportional / the increase factor, and average costs are constant. (3) When yields are rising, the long-term costs decrease. (4) When yields decrease long-term costs are rising. (5) Normally the company began taking increasing returns but as the situation is complicated diminishing appear. Overall yields are mixed.

San Juan Cell Phone Scenario

This scenario presented the actual dilemma of company San Juan Cell Phone in Puerto Rico. In this scenario the production manager need to analyze the potential risks, consequences positive or negative and possible solutions; of accepting the order of 100,000 units of cell phone of the company “Big Box” and accept or reject the external production of the cell by outsourcing, an external company called “Original Equipment Manufacturer”. In order to make a recommendation on what would be the best alternative for this scenario and to provide a solution that does not affect the company, analysis and recommendations will be divided into phases. In the first phase will analyze the unit profitability report of San Juan Cell Phones, which is found in Table 1 in the statistical appendix of this document. This table shows that the company San Juan Cell Phones has a price per unit for the Alpha model for $ 20, of which the variable costs per unit are $8, fixed overheads per unit are $ 9 and a profit per unit of $ 3.

The company “Big Box” will not pay more than $ 15 per cell phone; which implies a loss of $ 5 dollars per unit price for San Juan Cell Phone. If we analyze the loss from the perspective of the total cost of production, San Juan Cell Phones would have a total loss of production of $200,000, even without adding that there was no profit from this production. This loss would lead to other serious problems to company profitability, which will be difficult to replenish in the short term because the equilibrium price in the market is $15. Therefore can notice an excess supply. San Juan Cell Phones must make a comprehensive analysis of their variable and fixed costs and trying to lower them to compete with the market price and maintain profitability.

On the other hand, evaluating the offer that provides OEM to San Juan Cell Phones, where the price of production per unit is $14; we can see that San Juan Cell Phones could meet the production requested by Big Box and in turn obtain a profit of $100,000. This in turn allowing you to San Juan Cell Phone keeps the market equilibrium price of $ 15. Where the company can lower the current price per unit and maintain its excess demand in the market and maintain profitability. As part of this analysis shows that the grant to the outsourcing manufacturing, with the penalty would take to keep all their employees working and running the factory capacity. And therefore their bonus, which is based on the overall profitability of the company, is affected.

Recommendations of best alternative solution

In the second phase of this analysis will make the recommendations to follow to meet the expectations required by Bib Box, without loss of profitability, and to meet the value established by the company. Below the suggested recommendations: (1) Is to secure the order of 100,000 phones required by Bib Box. (2) Establish agreements with OEM outsourcing. In this agreement the Alpha prototype model and the quality of the prototype will be established, also limit the time of delivery and the amount of production is settled. In turn, the price of $ 14 per unit, which is not negotiable, is settled. (3) Establish a plan for reengineering the organization structure, technology and the human factor in the production line of Alpha models as initial phase of the process.

At a later stage the reengineering organization to another production line would be extended. Observe the appendix A: Guide for Strategic Planning and Organizational Reengineering. These recommendations are aimed to the San Juan Cell Phones company, can get the desired order to maintain profitability. In addition to be able to maintain its equilibrium price in the market, you can keep your excess demand, increase their volume of production and profits. In addition meet its corporate values ​​to provide its customers with high quality and exceed the expectations of them.


In the scenario presented the administrative task being viewed uncertain and challenging, as a number without variables, change and transformation is affecting it. It’s time for San Juan Cell Phones, perform an analysis of their strengths and limitations of your environment and make a formulation of strategic alternatives. This analysis will take the company to be more efficient and effective in meeting the needs of its consumers, taking into consideration an adaptability, a proactive character and flexibility to embrace change, in turn have a better interaction with new technologies and positive changes in the values ​​of corporate society attitude.

McConnell, C. R. & Brue, S. L. (2008). Economics: Principles, problems, and policies (17th ed.). Boston, MA: McGraw Hill/Irwin.
Pugel, T. A. (2007). International economics (13th ed.). Boston, MA: McGraw Hill/Irwin. University of Phoenix. (2014). Student Resources. Retrieve from https://newclassroom3.phoenix.edu/Classroom/#/contextid/OSIRIS:46311129/context/co/view/activityDetails/activity/d547f818-bc95-4e40-b161-61f94462bdb7/expanded/False Statistical Appendix

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