Case | HBS Case Collection | August 2012
Danshui Plant No. 2
by William Bruns, Julie H. Hertenstein and Kelvin Liu
Danshui Plant No. 2 in southern China has a one-year contract with Apple Inc. to assemble 2.4 million iPhones. In the first three months of the contract, the plant is unable to assemble as many phones as expected and is operating at a loss. The plant manager must analyze the budget and prepare a summary of monthly operations to help identify the source of performance problems. The plant has had difficulty hiring enough workers despite raising wages over 30%. In addition, the assembly process for an iPhone is complicated, with 140 steps involving over 100 components. The plant manager considers whether a flexible budget would be more useful for uncovering problems than the static budget currently being used. Students must perform breakeven and flexible budget analyses and calculate price and usage variances as they consider solutions for the plant's problems with the iPhone contract. This case, which explores the challenges of outsourcing manufacturing, can be used as an introduction to managerial accounting.
Keywords: Job Cuts and Outsourcing; Production; Budgets and Budgeting; Manufacturing Industry; Electronics Industry; China;
Ben MussiDanshui Plant No. 21. Prepare a fexible budget For 180,000 iPhone 4’s and calculate fexible budget variances using actual cAugust 2010 ±lexible Budget Preliminary Report on the Results oF OperaTons±lexible budgetActualVarianceUnits180,000 180,000 $ - Revenue$ 37,116 $ 37,476 $ 360 ±Variable costsMaterials±lash memory$ 4,860 $ 5,249 $ 389 UApplicaTon processor$ 1,935 $ 1,935 $ - Chips - phone$ 2,529 $ 2,529 $ - Gyroscope$ 468 $ 468 $ - 8 other chips$ 12,771 $ 12,643 $ (128)±Variable supplies and tools$ 11,256 $ 11,305 $ 49 USubtotal$ 33,819 $ 34,129 $ 310 ULaborAssembly and packaging$ 2,360 $ 3,092 $ 732 UShipping$ 190.80 $ 191.00 $ 0.20 U²otal variable costs$ 36,370 $ 37,412 $ 1,042 U±ixed costs:±actory rent$ 400 $ 400 $ - Machine depreciaTon$ 150 $ 150 $ - UTlity Fee and taxes$ 52 $ 52 $ - Supervision$ 127 $ 134 $ 7 U²otal ³xed costs$ 729 $ 736 $ 7 U²otal costs$ 37,099 $ 38,148 $ 1,049 UNet income$ 17 $ (672) $ (689)U2. EsTmate material price and quanTty variances For fash memories, and the overhead spending varian±lash MemoriesOverhead SpendingStandard QuanTty (SH)200,000 $ 729,000 Actual QuanTty (AH)180,000 $ 736,000 Standard Rate (SR)$ 27.00 Actual Rate (AR)$ 29.16 Price Variance (SR - AR)*AH$ (389,000.00)U$ - QuanTty Variance SR*(SH - AH)$ 540,000.00 ±- Overhead Spending Variance$ 7,000 U