Case Analysis

By: Sahil KASHYAP

DANSHUI PLANT NO. 2

Danshui is a contract manufacturer that assembled electronic products for companies in Southern
China. It has taken up a 12 month contract to assemble 2.4 million iPhone 4 for Apple. The main
problem is that in the third month of contract, production was only at 180,000 units per month and it
had incurred a loss of about $672,000 in the month of August. We try to find the potential reasons for
this loss by doing a flexible budget and variance analysis.
Answer 2: The total expected cost per unit with all manufacturing and shipping overhead (both variable
and fixed) is $205.7
The actual cost per unit of production and shipping is $211.93
Answer 3: Please refer to Appendix: Table 1
Answer 4: The material rate variance is due to the increased price of Flash Memory chips by 2$
accounting for $360 unfavorable material rate variance. But our unfavorable material efficiency variance
of $29 U in Flash Memory.
The labor rate variance of $708 is due to increase in wages by 30%. $24 unfavorable variance is due our
labor inefficiency.
Our Overhead spending variance is $7 U due to increase in spending in supervision.
Please refer to Appendix: Table 2 for further information.
Answer 5: As can be seen from the above analysis labor is the major reason why Danshui Plant no. 2 is
not able to reach its target of 200,000 iPhones in a month and also incurring a major loss. To increase
production and improve efficiency following strategies can be implemented:

Short Training to semi-skilled labor

Pay according to performance
Overtime allowances

All these strategies along with the increased labor costs have an adverse effect on the profitability of the
unit. To mitigate this effect we have two options:

Apple is having 60% profits, thus we can very well negotiate with Apple and pass on the burden
of the increased labor costs to them. Apple should be ready to take this after all Apple would
not want to fall short of iPhone 4 in the market which is detrimental to its market position.
A second, less viable, option can be to make a new plant in a relatively low cost location where
there is more unemployment thus reducing our labor costs. This not a viable option right now as
we do not have enough time to make a 2nd unit and start production there.

APPENDIX

Business Performance Management 2014-15

Case Analysis

By: Sahil KASHYAP

Table 1
BUDGET: DANSHUI

Monthly Budget

Actual

Flexible Monthly Budget

F/U

180,000 units

Flexible
Variance
0 units

200,000 units

180,000
units

41240

37476

37116

360

Flash Memory

5400

5249

4860

-389

Application Process

2150

1935

1935

Chips-Phone

2810

2529

2529

Gyroscope

520

468

468

8 other chips

14190

12643

12771

128

Variable Supply and Tools

12507

11305

11256.3

-48.7

Subtotal

37577

34129

33819.3

-309.7

Assembly and Packaging

2622

3092

2359.8

-732.2

Shipping

212

191

190.8

-0.2

Total Variable Costs

40411

37412

36369.9

-1042.1

Factory rent

400

400

400

Machine Depreciation

150

150

150

Utility fee and Taxes

52

52

52

Supervision

127

134

127

-7

Total Fixed Costs

729

736

729

-7

Total Costs

41140

38148

37098.9

-1049.1

Net Income

100

-672

17.1

-689.1

Revenue (transfer from

Shenzen)
Variable Costs
Materials

Labor

Fixed Costs

Table 2
Material Price Variance

360 U

Material Efficiency

29 U

Labor Price/Efficiency Variance

Labor hours required for 200,000 units

2850

2622/0.92

Actual Labor hours used

2585

Labor hours required for 180,000 units

2565

2850*0.9

0.92

Flexible Budgeted Cost

2359.8

Budgeted Cost/Labor
Hour
Actual Cost/Labor hour

Flexible Budgeted Cost adjusted for Labor

cost
Labor rate variance

3067.74

Actual Labor Cost

3092

Labor efficiency variance

24.26

Overhead Spending Variance

707.94

Business Performance Management 2014-15

1.196