Danshui Plant No.

Presented by

Group 6

Ankan Saikia

1411076

Gaurav Gulati

1411090

Manisha P.

1411103

Periyasamy S.

1411116

Soumyajit Lahiri

1411130

Introduction
Danshui Plant 2 is a contract manufacturer that assembles electronic products for companies
wishing to save labor costs
Apple had contracted Danshui Plant to assemble iPhone 4
According to the contract, Danshui had to assemble 2.4 million iPhones between June 2010
and May 2011
As of the third month of operation, Danshui was only able to produce 180,000 units per month
against the requirement of 200,000 units per month.
Wentao Chen, a manager at the plant was anxious that Danshui might not be able to fulfill the
terms and conditions of the contract

Problem Statement
Danshui Plant is under-producing In order meet the contract terms, Danshui is expected to produce 200,000 iPhones
monthly. However, the company is only producing 180,000 units
Lack of qualified labor & installation damages Assembly of iPhones was different from that of hard-drives in which Danshui had expertise.
Despite increasing the labor wages by 30%, Danshui was unable to attract enough qualified
labor.
Increased burden on supervisors The burden of the supervisors must have been increased as they must first learn before
guiding the workers, who were almost semiskilled.
Performance evaluation using standard costing system The company was using static budget instead of flexible budget while comparing the actual
production.

Break-even Quantity using Budget Data

Budgeted Fixed Cost per month

BOM (per unit) (Variable Cost)

Flash Memory

27.00

Factory Rent

400,000

Application Processor

10.75

Machine Depreciation

150,000

Chip for phone calls

14.05

Utility fee and local taxes

52,000

Gryoscope

2.60

Supervision

127,000

8 other purchased chips

70.95

Monthly Fixed Cost

729,000

$ 125.35
Variable Supplies & Tools

62.54

$ 187.89
Labor:
Assembly and packaging
(per unit)

Shipping (per unit)

Total Variable Cost

13.11
1.06

$ 202.06

Break Even Analysis

Revenue/Unit

206.2

Variable Cost/Unit
Contribution Margin (per
unit)
Total fixed Cost
(000s)/month

202.06

4.15

729

Break-even quantity/month

175875

Expected vs Actual Cost/Unit

Flash Memory

Expected
Actual Differenc
Cost/Unit Cost/Unit
e
27.0
29.0
-2.0

Application Process

10.8

10.8

0.0

Chips-phone

14.1

14.1

0.0

Gyroscope

2.6

2.6

0.0

8 other chips

71.0

70.2

0.7

Variable supplies and tools

62.5

62.8

-0.3

Subtotal

187.9

189.44

-1.6

13.1

17.2

-4.1

Shipping

1.1

1.1

0.0

Factory Rent

2.0

2.2

-0.2

Machine Depreciation

0.8

0.8

-0.1

Utility fee and local taxes

0.3

0.3

0.0

Supervision

0.6

0.7

-0.1

Total costs

205.7

211.77

-6.07

Assembly and packaging

Flash Memory Cost / unit has increased

from $27 to $29 (Apple has agreed to
compensate for this loss)
Labor Costs/Unit have also increased by
$ 4.1
Overall Actual cost/Unit is $ 6 more
than the budgeted cost/unit

Flexible Budget & Budget Variances

Revenue (transfer from Shenzhen)

Variable Costs
Materials

Flash Memory
Application Process
Chips-phone
Gyroscope

8 other chips
Variable supplies and tools
Subtotal

Labor

Assembly and packaging

Shipping

Total variable Costs

Fixed Costs

Factory Rent
Machine Depreciation
Utility fee and local taxes
Supervision

Total Fixed Costs

Total costs

Net Income

Fixed Budget
(200,000 units)

41,240

$
$
$
$
$
$
$

5,400
2,150
2,810
520
14,190
12,507
37,577

$
$
$

2,622
212
40,411

$
$
$
$
$
$

400
150
52
127
729
41,140

100

Actual
(180,000 units)

37,476

$
$
$
$
$
$
$

5,249
1,935
2,529
468
12,643
11,305
34,129

$
$
$

3,092
191
37,412

$
$
$
$
$
$

400
150
52
134
736
38,148

(672)

Variance
(200,000 units)

3,764

$
$
$
$
$
$
$

151
215
281
52
1,547
1,202
3,448

$
$
$

(470)
21
2,999

$
$
$
$
$
$

(7)
(7)
2,992

772

Flexible Budget
(180,000 units)

Variance
(180,000 units)

37,116

$
$
$
$
$
$
$

4,860
1,935
2,529
468
12,771
11,257
33,820

$
$
$
$
$
$
$

$
$
$

2,360
191
36,371

$
$
$

$
$
$
$
$
$

400
150
52
127
729
37,100

$
$
$
$
$
$

16

360.0

(389.000)
128.0
(47.8)
(308.8)

(732.2)
(0.2)
(1,041.2)

(7.0)
(7.0)
(1,048.2)

688.2

Price & Usage Variances (Flash Memory)

Actual Costs Incurred

Actual Input
(Actual Input Quantity Quantity * Budgeted
* Actual Price)
Price

Budgeted Input
Quantity * Budgeted
Price

Direct
Materials

(181,000 * $ 29)

(181,000 * $27)

(180,000 * $27)

Flash
Memories

$5,249,000

$ 4,887,000

$4,860,000

$362,000 U
Price variance

$27,000 U
Quantity variance
$389,000 U
Flash Memory Cost Variance

Price & Usage Variances (Labor & Overheads)

Direct
Labor

Actual hours * Actual

Rate

Actual Hours *
Standard Rate

(2585,284 * $ 1.196)

(2585,284 * $
0.92)

$3,092,000

$2,378,461

$713,538 U
Rate variance

Standard Labor Cost

(2565,000 * $ 0.92)
$ 2,359,800

$18661 U
Efficiency variance

$732,199 U
Labor Cost Variance

Overhead Spending
Variance is $ 7000. The
difference is because of
extra supervision cost.

Analysis of variance
Item

Variance

Cause of Variance

Revenue

$ 360

This increase is because Apple raised the revenue by $ 2

per unit.

Flash Memory

-$ 389

However the material price variation is being

compensated by Apple. So the quantity of variation that
Danshui has to absorb is quite less i.e. $27000

8 other chips

+ $ 128

Variable supplies and tools - $ 47.8

Could also be due to less qualified labor

Assembly and packaging

- $ 732.2

Due to increased cost of labor by 30%. (Fox conn

increased the labor cost by 35% and is also building the
plant where the labor is cheaper)

Supervision

-$7

Again labor cost related issue

Net Income

- $ 688

Mainly due to high labor costs

Cost-Volume-Profit Analysis
With Budgeted Cost

With actual Cost

$ 206.2

$ 208.2

Variable Cost per unit

$ 202.06

$ 208.1

Fixed Cost per month

$ 729,000

$ 736,000

Contribution Margin per unit

$ 4.15

$ 0.1

Break even quantity

175875

7,360,000

Margin of safety

24,125

Contribution Margin Ratio

0.02

Operating Leverage

8.29

Revenue per unit

So we find that contribution margin ratio and margin of safety are quite low for the
order. A slight variation in the variable cost would turn the order unviable to
manufacture. So even though labor costs form 7% of the total sales price, a 30%
increase has put the profits in red. This is mainly due to lack of labor and possibly since
learning curve is yet to set in. The revenues have also suffered due to lower production
volume. On the other hand, Apple earns a profit margin of 60% on the sale of iPhone 4.

Recommendations to manage labor cost

Labor costs are behind the woes of Danshui 2 plant. But it seems other manufacturers like
Foxconn are also experiencing the same problem. Foxconn increased the labor wage by as much
as 35%.
Under the present scenario following measures can be taken.
Negotiate for a cost + basis contract with Apple.
. Negotiating with Apple for price escalation based on the wage index since the wage
increase is industry wide phenomenon. Loss of business to competitors only on account of
wages may not be happen.
.Training and development of labor. This will increase productivity of the existing labor.
.Changing salary to Fixed and variable component.
.Have overtime till the time required numbers of qualified workers are not recruited.
.As a last measure, Danshui can also outsource the production to some third party.

Effects of Recommendations

Meet Contractual
Obligation
(200,000 units)
Training
Pay for performance
policy
Overtime
Further Outsource
Negotiate with Apple
for wage index based
payment

Maximize Company
Profit

Deliver Quality
Product to client

THANK YOU