Case Study: Danshui Plant No2

Case study: Danshui plant No2
Case Overview:
Danshui is a Chinese contract manufacturer specialized in assembling electronic products. The

plant is considered as a profit center. It has a very competitive environment and its biggest competitor
is Foxconn.
To meet the high demands, Apple signed a 12-month contract with Danshui to assemble the
new Iphone4, even though Danshui was only assembling hard drives.
The problem: Danshui plant is not keeping up with the expectations regarding production
(180 000units/month compared to an expected 200 000 units/month). Besides, contrary to a positive
estimated profit for the first months of production, Danshui had a $672 000 loss in August. Another
problem is employing semiskilled workers, who are specialized in hard drives, and finding the needed
working force in an intensive competitive environment.
Question 1: Break-even point (Budget Data)
Production Units 200,000

Revenue $ 41,240,000
Total variable costs $ 40,411,000
Price per unit $ 206.20
Variable cost per unit $ 202.06
Contribution Margin $ 4.14
Fixed costs $ 729,000
Break Even Point (in units) 176,087 units
Question 2:
Assumption: all manufacturing and shipping overhead are allocated to planned production
Budgeted Actual
Production Units $ 200,000 $ 180,000
Total variable costs $ 40,411,000 $ 37,412,000
Fixed Costs $ 729,000 $ 736,000
Total Costs $ 41,140,000 $ 38,148,000
Total Costs per unit $ 205.7 $ 211.9
Question 3: Flexible Budget (in $)
Monthly Static Flexible Budget

Budget Flexible Budget Variance Actual Amounts
Production Units 200 000 180 000 0 180 000
Revenue (transfer from Schenzen) 41 240 000 37 116 000 F 360 000 37 476 000
Variable costs :
Materials :
Flash memory 5 400 000 4 860 000 U 389 000 5 249 000
Application process 2 150 000 1 935 000 0 1 935 000
Chips-Phone 2 810 000 2 529 000 0 2 529 000
Gyroscope 520 000 468 000 0 468 000
8 other chips 14 190 000 12 771 000 F -128 000 12 643 000
Variable supplies and tools 12 507 000 11 256 300 U 48 700 11 305 000
Materials subtotal 37 577 000 33 819 300 U 309 700 34 129 000
Labor 2 622 000 2 359 800 U 732 200 3 092 000
Shipping 212 000 190 800 U 200 191 000
Total Variable costs 40 411 000 36 369 900 U 1 042 100 37 412 000
Fixed costs :
Factory rent 400 000 400 000 0 400 000
Machine depreciation 150 000 150 000 0 150 000
Utility fee and taxes 52 000 52 000 0 52 000
Supervision 127 000 127 000 U 7 000 134 000
Total Fixed Costs 729 000 729 000 U 7 000 736 000
Total costs 41 140 000 37 098 900 U 1 049 100 38 148 000
Net Income 100 000 17 100 U -689 100 -672 000
Question 4 : Price and Efficiency variances for Flash Memory and Labor
Price Variance: (budgeted price of input – Actual price of input) * Actual quantity
Efficiency Variance : (Budgeted quantity of input allowed for actual output – Actual quantity of input used) * Budgeted price
of input
Materials Price Variance - Flash Memory (in $)

Budgeted Price - Actual Price -2,00
Actual Flash Memory Quantity* 181 000
Flash Memory Price Variance U -362 000
*Actual quantity = 180 000 (one flash memory per unit assumed) + 1000 (damaged flash memories)
Materials Usage Variance - Flash Memory (in $)

Budgeted Flash Memory quantity 180 000
Actual Flash Memory quantity 181 000
Budgeted Quantity allowed for actual output - Actual Quantity -1 000
Budgeted Price 27
Materials Usage Variance U -27 000
Flexible Efficiency Flexible Price Actual
budget 1 Variance Budget 2 Variance
(Labor usage) (Labor price)
Labor : Assembly and Packaging 2 359 800 U -27 662 2 387 462 U -704 538 3 092 000
=3 092 000 /1.3**
**Wages increased by
30% since August
Overhead Spending Variance for August

Budgeted Overhead spending 729 000
Actual Overhead spending 739 000
Overhead Spending Variance U -7 000,00
Question 5: Recommendations
1- The variance analysis shows that labor variance is the most unfavorable, and is nearly twice
bigger than Flash Memory variance. Besides, the negative variance for flash memory prices
will be covered by an increase in payment from Apple. The managers should then review the
labor costs. A possible solution is : quality training of the employees in order to fulfill the
Apple contract in a thorough and efficient manner, by increasing labor efficiency (which is
actually unfavorable) and to have a skilled and prepared workforce to win more future phone
assembling contracts. However, this option is time consuming and might cause additional
costs.
2- Automation and reducing production’s steps: each Iphone 4 is handled by 325 individuals and
requires more than 140 steps. Automation would make the process less complex and more
structured.
3- It’s important to state that Danshui has just started to produce so maybe dividing the budget
into 12 equal months is not the most suitable because it may discourage managers and workers
and the production may increase afterwards. However, changing the budget won’t solve the
problem because Danshui is losing money. So maybe they should readapt the budget, based on
the production advancement, in order to make it challenging but without trying to hide the fact
they are at loss.
4- Outsourcing in order to fulfill the Apple contract and preserve a good image in an intensive
competitive environment but this may lead to additional costs for Danshui.

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What problems is Danshui plant facing?

What are the variances in the flexible budget?

Case study: Danshui plant No2

Danshui is a Chinese contract manufacturer specialized in assembling electronic products. The

Question 1: Break-even point (Budget Data)

Production Units 200,000

Monthly Static Flexible Budget

Materials Price Variance - Flash Memory (in $)

Materials Usage Variance - Flash Memory (in $)

Overhead Spending Variance for August

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