Danshui Plant No 2 Case Study Solution Report

Managerial Accounting ACCT 2301 | Danshui Plant - Case 2 Prof: Edward Dinan Akhil Bansal, Yousif Alatiqi, Christina Apostolou and Hamad Alfuttaim 14th April, 2016 Danshui Plant No. 2 Case Study Project ACCT 2301 | Managerial Accounting | Prof: Edward Dinan Akhil, Yousif, Christine & Hamad Question 1: Using budget data, how many Apple iPhone 4’s would have to have been completed for Danshui Plant No. 2 to break even? Answer 1: The Break-even quantity came out to be approximately 175,875 units per month. It was calculated by finding out the selling price and variable cost per unit and then eventually finding out the contribution per unit. Fixed cost was then divided by the contribution to find the breakeven output, as shown in the chart below: - 1 - Question 2: 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? Answer 2: As shown in the chart below, the expected cost per unit came out to be $205.70 which was calculated by dividing budgeted total cost by budgeted production units. The actual cost per unit was $211.93 which was calculated by dividing actual total cost by actual production units. - 2 - Question 3: Prepare a flexible budget for 180,000 iPhone 4’s and calculate flexible budget variances using actual costs for August. Answer 3: The table below consists of Actual Budget and Flexible Budget for the month of August 2010 which has been adjusted to the number of units sold. It also consists of a Variance column, which is the difference between the Actual Budget and the Flexible Budget; and also a Performance column which indicates whether it is a Favorable or Unfavorable Variance. - 3 - Question 4: Estimate material price and usage for flash memories, labor rate and usage (efficiency) variances, and the overhead spending variance for August. Answer 4: For the Flash Memory Usage Variance, the standard quantity is 180,000 units of flash memory and the actual quantity used was 181,000 units, since 1000 units of flash memory got wasted. The standard price is $27 per flash memory whereas the actual price is $29, since Samsung raised the cost by $2. Labor Price Variance was calculated by subtracting SP*AQ from AP*AQ since the number of hours per unit is not provided. However, since the wages increased by 30% the SP*AQ will be 1.3 times of AP*AQ, which makes it easier to calculate the Labor Price Variance. Labor Usage Variance was simply calculated by reducing the Labor Price Variance from the Total Labor Variance. Finally, the Overhead Spending Variance was calculated by reducing the Standard Fixed Overhead from the Actual Fixed Overhead. - 4 - Question 5: 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? Answer 5: There are several problems that Wentao Chen is experiencing with the Apple iPhone 4 contract. Some of them are: • Underproduction - Only able to produce 180,000 units per month when it actually needs to produce 200,000 units per month; leading to decreased revenues. • Shortage of Qualified Labor - It is not able to attract more qualified labor since it is not paying enough wages, hence cannot meet its target 200,000 units of production. • Wastage of Materials - By not dealing with the flash memory carefully, 1000 units were wasted leading to increased cost of production. In order to maintain good relations with Apple and provide them with the promised quantity of 2.4 million by the end of the contract, Wentao Chen can tackle the problems mentioned above in several ways. Some of the ways to deal with them are: • Outsourcing - In order to meet the contract requirements and produce 200,000 units of output, Wentao can consider outsourcing 240,000 units of iPhone 4s (20,000 shortage x12 months) since it is only capable of producing 90% of the units promised to Apple in the contract. This is going to increase the costs and lower the profitability for Wentao Chen. • Training - Because of a shortage of qualified labor, Wentao can make his workers more productive and efficient by giving them the opportunity to improve their skills through internal or external training. However, the project being a short term project and only 9 - 5 - months left to complete the promised output, Wentao may not be able to afford to send some of his workers for training, since the production quantity will be negatively impacted. Also, providing the training will increase the costs for Wentao. • Increasing Wages – This will attract more qualified labor to increase the output but will definitely increase the costs by a higher percentage as the new workers will also have to be introduced to the production process and given training to fulfill the demand in a very short span of time. • Implement Piece rate payment method – A change in the payment methods can contribute in increasing the motivation of the workers to produce more. If piece rate payment method is implemented it might lead to more number of iPhone units being produced, but can lead to increase costs for the company as workers might rush and not make the iPhones as per the standards, or they might not handle Samsung flash memory carefully, leading to even more wastage. • Implement Hourly rate payment method – Hourly rate can contribute in increased production as more workers will be motivated to stay and work longer hours. On the other hand, the labor is not very skilled, might just stick around to earn more and not work with the same efficiency and all of this shall also lead to a slackness in the normal production process, hence increasing the costs. Most of the strategies mentioned above will help Wentao maintain good relations with Apple and provide them with the promised quantity, but it would lead to increased costs and lower profitability for Wentao which is why he should try and renegotiate the contract with Apple and come to a mutual agreement which acts in favor of both the parties. - 6 -

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Case | HBS Case Collection | August 2012

Danshui Plant No. 2

by William Bruns, Julie H. Hertenstein and Kelvin Liu

Abstract

Danshui Plant No. 2 in southern China has a one-year contract with Apple Inc. to assemble 2.4 million iPhones. In the first three months of the contract, the plant is unable to assemble as many phones as expected and is operating at a loss. The plant manager must analyze the budget and prepare a summary of monthly operations to help identify the source of performance problems. The plant has had difficulty hiring enough workers despite raising wages over 30%. In addition, the assembly process for an iPhone is complicated, with 140 steps involving over 100 components. The plant manager considers whether a flexible budget would be more useful for uncovering problems than the static budget currently being used. Students must perform breakeven and flexible budget analyses and calculate price and usage variances as they consider solutions for the plant's problems with the iPhone contract. This case, which explores the challenges of outsourcing manufacturing, can be used as an introduction to managerial accounting.

Keywords: Job Cuts and Outsourcing; Production; Budgets and Budgeting; Manufacturing Industry; Electronics Industry; China;

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