Danshui Plant Case Study

DANSHUI PLANT #2 CASE

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1. Using budget data, how many Apple iPhone 4’s would have to have been completed for Danshui Plant No. 2 to break even?

The number of Apple iPhone 4 required are 175,875 units.

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1. Using budget data, what was the total expected cost per unit if all manufacturing and shipping overhead (both variable and fixed) were allocated to planned production? What was the actual cost per unit of production and shipping?

The total expected cost per unit is $205.70. The actual cost per unit is $211.93.

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1. Prepare a flexible budget for 180,000 iPhone 4’s and calculate flexible budget variances using actual costs for August.

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1. Estimate material price and usage variances for flash memories, labor rate and usage (efficiency) variances. Assume that the standard labor rate is $0.92 per hour. Also estimate the fixed overhead spending variance for August.

Formula used:

Price Variance = Actual Quantity* (Actual Price-Standard Price)

Quantity Variance= Standard Price * (Actual Qty- Standard Qty)

For flash memories:

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For Overhead:

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For labor:

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Standard Labor Rate/Hr = $0.92

Actual Labor Rate/hr = $1.192 = 1.3*0.92

Standard Labor per unit = $13.11

No of hours for 1 units= $13.11/$0.92 = 14.25

No of Standard Labor hours for 180,000= 2,565,000

No of Actual Labor hours for 180,000 = 2,585,284

1. (Variation of question 4 above). Now assume that the standard labor rate of $0.92 per hour is not provided to you. Estimate material price and usage for flash memories, labor rate and usage (efficiency) variances, and the overhead spending variance for August.

For flash memories:

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            For labor:

Labor Price Variance = Actual Hours * (Standard Price - Actual Price)

                                   = Actual Hours * (Actual Price / (1+30%) – Actual Price)

                                   = Actual Hours * Actual Price * (1/1.3 - 1)

                                   = 3092000*-0.23 = -$713568 unfavorable

Labor Usage = Standard Price * (Standard Hours- Actual Hours)

                      =SP * SH - SP * AH

                      = -3092000/1.3 +2360000

                      = -$18661 unfavorable                          

For Overhead:

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1.  What are some strategies or decisions that Wentao Chen should consider in trying to solve the problems with the Apple iPhone 4 contract in the next nine months? How would these change the costs and profitability of Danshui Plant No. 2 and the iPhone 4 contract?

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Contribution Margin and Margin of Safety is quite low for the order. Therefore, a little variation in the variable cost make the order unprofitable to manufacture. That is why even though labor cost is just 7% of the total cost, a 30% increase in the labor cost resulted in negative profits. This can be attributable to mainly due to lack of labor, and also because the experience curve is yet to set in. Obviously, revenue have also gone down due to low volumes in production. On the contrary, Apple earns 60% margin on the sale of iPhone 4.