DANSHUI PLANT – CASE 2

PRESENTED BY GROUP NO.6

Rishabh Vijay 19P106

Diksha Miglani 19P080
Kunal Sadhwani 19P089
Shubham Jain 19P115
Ayush Garg 19P077
Mithilesh Verma 19P095

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 break- even output, as shown in the chart below:
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.

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.
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.
 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 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.