Harvard Business School Case: W. Burns, J H. Hertenste, and K Liu
Budget Actual Budgeted Sales $41,240
Budgeted Sales Units 200
Budgeted Selling Price $206.20
Contribution Income Statement (Unit Cost) 200 180
Budget Actual Unit Selling Price $206.20
Unit Variable Costs:
Materials $187.89
Labor $13.11
Shipping $1.06
Total Unit Variable Cost $202.06 Unit
Contribution Margin $4.14
Total Fixed Costs $729.00 Unit
Fixed Cost $3.65 Unit
Gross Margin $0.49
Breakeven Units 176,087
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
Answer: 176,087 iPhones
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
Overhead Spending Variance
= [$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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Note: This may not be correct to all as the numbers on each case study may vary.
