Danshui Plant No.2

Danshui Plant No.2 Introduction Wentao Chen, the manager of Danshui Plant No.2 in southern China, was anxious due to the performance of factory and manufactures 20000 fewer iPhones than budgeted. Danish Plant 2 has agreed upon a contract to assemble 2.4 Million iPhones with a 12 month period. For this reason, a standard budget has been prepared which is divided equally over 12 months to track the performance of the actual production and compare variances verses the standard budget. From the period of June 2010 till August 2010 it was an alarming situation that Danishu Plant 2 was unable to meet its target of production due to lack of skilled labor. Analysis Using budget data, how many iPhones 4 are required for breakeven. Breakeven point in units will indicate how much units should be produced to cover the fixed overheads; every month factory incurs the cost of $729,000 which should be recovered by selling 176,087 units of iPhone. Exhibit 1 shows the detail calculations, breakeven point can be calculated using budgeted data given in standard costing. Each Apple iPhone will be sold for $206.20, and variable cost is estimated to be $202.06 which contributes $4.14 per unit towards fixed cost. Break-even analysis helps in planning of iPhones given the maximum contribution towards profits and fixed cost. Variable Costs = Material Cost + Labor Cost + Shipping Cost = 187.89+13.11+1.06 = 202.06 / Unit Fixed Costs = 729,000 / Month Price = 41,240,000 / 200,000 = 206.2 Contribution Margin = 206.2-202.6 = 4.14 / Unit When it comes to the break even, Contribution margin * Unit(BE) = Fixed Costs. Unit(BE) = 729,000 / 4.14 = 176,086.96， So the break even for Danshui is 176,087. 1. 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 (using 200,000 units) production? Formula= (Total cost/Total units produced) Total cost $41,140,000 Budget production units= 200,000 Expected cost per unit= $205.70 What was the actual (using 180,000 units) cost per unit of production and shipping? Formula= (Total cost/Total units produced) Actual total cost = $38,148,000 Actual production unit = 180,000 Actual cost per unit= 211.93 2. Prepare a flexible budget for 180,000 iPhone 4s, and calculate flexible budget variances using actual costs for August. 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 Actual Price: 5,249,000/181,000=$29 Standard Price: 5,400,000/200,000=$27 Actual Quantity: 181,000 units Standard Quantity: 180,000 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 – Standard Quantity) × Standard Price = (181,000–180,000)×27 = $27,000 Unfavorable 3. For the month of August, calculate the following variances (assuming the standard labor rate is $0.92 per hour): Basically, variance analysis means the difference of the standard and actual outcomes with the consistency and efficiency of the product or company levels. Variances can be positive or negative, the negative may arise due to inadequacy of the management, or it may come from a certain variation in the economy prices of the material and labor. Variances shows lack of labor efficiency by useof Samsung flash chip in the iPhone 4 and they are losing approximately 1000chips per month. Although hiring is complete with skill full labor. Further material changes come due to price changes. Overhead variance occurs due to the inefficiency of the production department. a. Material price variance for flash memories Material Price Variance for Flash Memory = 5,249,000-27.00*180,000 = $388,800 U b. Material usage variance for flash memories Material Usage Variance for Flash Memory = (180,000-200,000)*27 = 20,000*27 = 540,000 F c. Labor rate variance Actual rate= 3,092,000/180,000=17.18 Formula= (Actual rate- Standard rate) X actual hour (production)= = (17.18-13.11) X 180,000=732,600 U d. Labor usage (efficiency) variance (200,000 – 180,000) * 13.11 = 262,200 F e. Overhead spending variance Formula= (Actual fixed manufacturing overhead – Standard fixed manufactured overhead) =736,000 – 729,000= $7,000U 4. What are some strategies or decisions that Wentao Chen should consider when trying to solve the problems with the Apple iPhone 4 contract in the next 9 months? Wentao Chen should learn how to conducts a variance analysis because variance analysis is one of the most effective procedures that can be used to analysis and make adjustment for any variation in the cost of production over the original agreed costs. For example, through variance analysis, Danshui plant management can understand the main sources of the variances and determine how to apportion the variances. Additionally, by variance analysis, the team can determine the most effective costing strategy that can help the company to absorb the additional production costs. The new costing strategy will help the company and the contractors overcome costing related issues. Finally, the company should learn how to reconcile the difference between absorption and variable income to determine the actual cost per unit. How would these change the costs and profitability of Danshui Plant No. 2 and the iPhone 4 contract? Approach this from both Danshui's and Apple's point of view. The changes would increase the cost of production, and the profitability of the Danshui plant number 2. The company will either employ more employees in order to increase the total output per day or purchase additionally plants (machines) to manage the processes that can be automated. It is important to note that the profit is a variable of production costs and sales. but the company aims at increasing the production volume. There are fixed costs that will not change irrespective of the total units produced. However, the fixed manufacturing overhead cost should be included in the units cost.