# Danshui Plant №. 2

Harvard Business School Case: W. Burns, J H. Hertenste, and K Liu

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

Production units = 200 units

Revenue = \$41,240

Variable cost = 187.89 + 13.11 + 1.06 = \$202.06 per unit

Fixed cost \$729,000 per month

Price per units (revenue/unit) = \$206.20

Contribution Margin = \$206.2 — \$202.06 = \$4.14 per unit

Breakeven point= fixed cost/contribution margin

Break-even = 729,000 / 4.14 = 176,086.96 units

What was the total expected cost per unit using budget data 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?

• Budget Actual Unit Variable Cost: \$202.06 Unit
• Fixed Cost \$3.65 Cost per Unit
• (+) — — — — — — — — — — — — — — — — — — — — — — — — — — — —

Total Expected Cost per unit: \$205.71

Total Expected Cost per unit: 41,140,000 / 200,000 = \$205.7 per unit

Actual Cost Per Unit: 38,148,000 / 180,000 = \$211.93 per unit

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

Actual Price: 5249000/181000=\$29

Standard Price: \$27

Actual Quantity: 181000 units

Standard Quantity: 180000 units

Price Variances for Flash Memories= (Actual Price — Standard Price)× Actual Quantity= (29–27)×181,000= \$362,000 Unfavorable

Usage Variances for Flash Memories= (Actual Quantity — StandardQuantity) × Standard Price= (181000–180000)×27 =\$27000Unfavorable

Standard Labor Rate: \$11.8/hour
Actual labor rate: \$15.36/hour
Standard hours: 2359,800 /11.8=199983
Actual hours: 3092000/15.36= 201302
Labor Rate Var:(15.36–11.8)*201302=\$716653.12 Unfavorable Efficiency Variance: (201302–199983)*11.8=\$15564.2 Unfavorable

Estimate material price and usage for flash memories, labor rate and usage (efficiency) variances, and the overhead spending variances for August.

Material price variance for flash memories

= [\$29.16 — \$27.00] x 180,000
= \$2.16 x 180,000
= \$388,800 UN = [180,000–200,000] x \$27 = 20,000 x \$27= \$540,000 F
\$388,800 — \$540,000 = \$151,200 Favorable

Labor rate variance & Labor usage (efficiency) variance = [\$13.11–17.18] x 180,000

= \$4.07 x 180,000
= \$732,600 UN [180,000–200,000] x \$13.11 = 20,000 x \$13.11= \$262,200 F
\$732,600 — \$262,200 = \$470,000 Unfavorable

= [\$736,000 –\$729,000]= \$7,000 Unfavorable

What strategies or decisions would Wentao Chen consider in solving the Apple iPhone 4 contract problems in the next nine months? How would these change the costs and profitability of Danshui Plant №2 and the iPhone 4 contract?

As cited in the case, the industry has a significant problem finding enough labor to meet their production. This should be the topmost priority of the firm. The solution to this problem would be to increase the labor rates to meet workers’ demand in the area. Although the firm increases its labor by roughly 30%, this was inadequate to meet the demand. If the firm can increase its labor rates to the position where it can hire enough employees to complete production, it should significantly minimize its loss. While analysts oscillate to inquire about fixed manufacturing costs and other variable costs, we cannot conjecture that these expenses can be altered.

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Knowledge share = Knowledge square. All the best!

Note: This may not be correct to all as the numbers on each case study may vary.

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