Danshui Plant No.2 The following case focuses on Danshui, a contract manufacturer that assembled electronic products. Danshui is currently in the third of a 12 months’ contract to assemble 2.4 million units of Apple’s iPhone 4. Monthly production target for Danshui is 200,000 units but three months’ study reflects that Danshui may not meet this target in 12 months and would also overrun the cost barrier thus landing in an unprofitable situation. Plant controller, Jianye Ma presented her analysis for August production to the plant manager, Wentao Chen. According to this report, the main difficult the plant is facing is being able to hire enough people to get the production to the 200000 units per month budgeted, despite having increased wages by a 30%. Questions 1. A. Total expected Cost – 41,140,000$ for 200,000 units
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Cost per unit – 205.70$ B. Actual Cost – 3,8148,000$ for 180,000 units
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Cost per unit – 211.91$ 2. The flexible budget variances can be seen in Appendix1. According to the results, there is an overall unfavourable variance of 1048.2$. this means, that even if production has been 180,000 instead of 200,000, there is still a variance NOT EXPLAINED by the reduction in volume. The colours in appendix one represent whether the impact of the variance is positive (green) or negative (red). It can be seen, that assembly and packaging represents the highest variance (70% of the total) with flash memory in second place. This results are in line with what Jianye Ma stated as the greatest concern of the firm We cannot find people to hire even though we have raised our factory wages by almost 30%. On the other hand, the variance in the flash memory is due to the instalment problems that are also commented on the text. The most positive variance is the 8 other chips line. 3. a. Price Variances for Flash Memories = (Actual Price – Standard Price) * Actual Quantity = (29.16 - 27) *180,000 = $388,800 Unfavourable b. Usage Variances for Flash Memories = (Actual Quantity – Standard Quantity) * Actual Quantity = (180,000 – 200,000) * 180,000 = 540,000 Favourable
c. Direct Labour Rate Variance = (Actual Rate – Standard Rate) *production = (17.18 – 13.11) *180,000 = 732,600 Unfavourable
d. Direct Labour Efficiency Variance = (Actual Hour – Standard Hour) *Standard Rate = (180,000 – 200,000) *13,11 =$262,200 Favourable
e. Fixed Overhead Spending Variance = Actual Fixed Man. OH – Standard Fixed Man. OH =$736,000 - $729,000 = $7000 Unfavourable 4. Assembly and packaging represent the highest variance the firm is facing. This means that the actual labour costs are greater than budgeted. A way to solve this issue could be to outsource the assembly process. In addition, if Danshui does not want to outsource production, it should focus on encouraging its labour force, i.e. applying a performance policy or hiring more people (focusing on areas with huge unemployment). Some other alternatives would be short training to increase production efficiency, or increase wages. All of this measures would induce an additional cost in the short run, but it is the only way of keeping up to schedule and avoiding the unfavourable variance in assembly. Analysing the numbers obtained in the previous exercise, we see that labour efficiency has a positive variance, meaning the efficiency is better than expected, however, this increase in efficiency is outweighed by the unfavourable variance in Labour rate, meaning that the increase in efficiency is not paying off. The firm should hence focus on trying to diminish the actual labour rate (outsourcing) or increasing efficiency even further (performance bonus, short train).

Moreover, it should be noted that materials for flash memories also pose a huge unfavourable variance that should be taken into account. According to this fact, the actual material costs are higher than expected and this is having a negative impact on the profit line.

Appendix

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[ 1 ]. To calculate the actual price, divide actual material cost for flash memories and actual units, 5249,000/180,000
[ 2 ]. To calculate the actual rate, divide actual labour for assembly cost and actual units, 3,092,000,000/180,000