Download Danshui Plant No. 2 PDF

TitleDanshui Plant No. 2
TagsEconomies Economics Business Economics Cost Labour Economics
File Size425.3 KB
Total Pages2
Document Text Contents
Page 1

Case Analysis By: Sahil KASHYAP

Business Performance Management 2014-15


Danshui is a contract manufacturer that assembled electronic products for companies in Southern

China. It has taken up a 12 month contract to assemble 2.4 million iPhone 4 for Apple. The main

problem is that in the third month of contract, production was only at 180,000 units per month and it

had incurred a loss of about $672,000 in the month of August. We try to find the potential reasons for

this loss by doing a flexible budget and variance analysis.

Answer 2: The total expected cost per unit with all manufacturing and shipping overhead (both variable

and fixed) is $205.7

The actual cost per unit of production and shipping is $211.93

Answer 3: Please refer to Appendix: Table 1

Answer 4: The material rate variance is due to the increased price of Flash Memory chips by 2$

accounting for $360 unfavorable material rate variance. But our unfavorable material efficiency variance

of $29 U in Flash Memory.

The labor rate variance of $708 is due to increase in wages by 30%. $24 unfavorable variance is due our

labor inefficiency.

Our Overhead spending variance is $7 U due to increase in spending in supervision.

Please refer to Appendix: Table 2 for further information.

Answer 5: As can be seen from the above analysis labor is the major reason why Danshui Plant no. 2 is

not able to reach its target of 200,000 iPhones in a month and also incurring a major loss. To increase

production and improve efficiency following strategies can be implemented:

 Short Training to semi-skilled labor

 Pay according to performance

 Overtime allowances

All these strategies along with the increased labor costs have an adverse effect on the profitability of the

unit. To mitigate this effect we have two options:

 Apple is having 60% profits, thus we can very well negotiate with Apple and pass on the burden

of the increased labor costs to them. Apple should be ready to take this after all Apple would

not want to fall short of iPhone 4 in the market which is detrimental to its market position.

 A second, less viable, option can be to make a new plant in a relatively low cost location where

there is more unemployment thus reducing our labor costs. This not a viable option right now as

we do not have enough time to make a 2nd unit and start production there.


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