Danshui Plant

1. Please refer to Exhibit 1 for complete answer.

2. Please refer to Exhibit 2 for complete answer.

3. Please refer to Exhibit 3 for complete answer.

4. Please refer to Exhibit 4 for complete answer.        

5.  From the Flexible-Actual Variance table in question 3, we saw a substantial unfavorable variance on Labor, which is $732,000. From the calculations in question 4, we know that most of variances came from the increase in wages. This is the result of plant manager’s efforts to recruit more workers. However, this move hasn’t necessarily bore any intended results, as the plant is still struggling to find more workers. There is also a $15,365 unfavorable labor efficiency variance, which is likely the result of less qualified labor, that should be addressed.

Looking at the flash memory line, this particular part has a significant unfavorable variance of $389,000. This is mainly the result of Samsung increasing the price by $2, to resolve problems that earlier had caused 1,000 parts to be damaged during installation. The unfavorable variance for the most part was neutralized by the sales revenue favorable variance of $360,000, which is mainly from the $2 per iPhone revenue recovery from Apple. The cost of the damaged parts, however, was not recovered, which cost the plant the extra variance of $29,000.

The eight other chips cost has a favorable variance of $128,000, likely because of a price decrease. The variable supplies and tools cost has an unfavorable variance of $49,000, meaning that Danshui either had to purchase more tools than expected or used them less efficiently. Furthermore, supervision has an unfavorable variance of $7,000, likely because of a salary increase. Overall, though there is a favorable variance in the sales revenue, the extra costs create an unfavorable variance of $689,000 for the net income.

6. Danshui Plant No.2 has two critical problems. First, with the current production rate, they won’t be able to fulfill the contract with Apple. Second, the main obstacle to higher net income is the large labor variance. The contract with Apple has the highest priority, as failure to deliver could affect the parent company’s standings and ability to negotiate contracts in the long run.

There are some measures that can be adopted to counter these problems. In the short run, the plant should attempt to meet its production target of 200,000 units/month. One way to achieve this would be to increase wages and workers’ benefits to draw in more recruits, from the unemployment pool and from competitors’ plants. We also recommend Chen to ask for assistance from parent company and sister plants to transfer more working capital, employees and machinery to fulfill the production target. When the production rate is up to speed, more resources could be channeled in to compensate for the lacking 60,000 units in the first 3 months. However, these measures will undoubtedly increase costs and significantly reduce profitability of both the plant and the current contract in the short run, but the long-term gains from keeping a good standing with Apple may overwhelm short-term losses.

In the long run, the plant should attempt to solve the second problem of unfavorable labor variance to keep the plant profitable. With razor thin profit margin, even a $15,365 efficiency variance would have been 15% of budgeted net income. Thus, we recommend that a new assembly method be introduced to increase efficiency and reduce waste. Regarding labor price variance, with competitive wages from competing plants, it may be very difficult to maintain production rate while reducing wages. Hence another long-term solution is to set up new plants in areas with higher unemployment, such as landlocked parts of China or other countries such as Vietnam, Cambodia, etc., where lower wages may be acceptable.

Exhibit 1. Break-even point in units

Sales per unit = 41,240,000 / 200,000 = $206.20

Variable costs per unit = 187.89 + 13.11 + 1.06 =        $202.06

Contribution margin per unit = $206.20 - $202.06 = $4.14        

Fixed costs = $729,000         

Break-even point in units (monthly) = 729,000 / 4.14 = 176,087 units

At the end of 12-month contract = 176,087 x 12 = 2,113,043 units

Exhibit 2. Total costs per unit

Using budget data,

Exhibit 3. Flexible-Actual Variance