# Danshui Plant No 2 Case Solution

Solution Id Length Case Author Case Publisher
2514 1452 Words (7 Pages) William J. Bruns, Julie H. Hertenstein, Kelvin Liu Harvard Business School : 913525
This solution includes: A Word File and An Excel File

Danshui Plant manufactures and assembles electronic products for companies looking for labor cost savings. It has been awarded a year long contract by Apple to assemble 2.4 million iPhone 4. The plant manager, Wentao Chan, is responsible for controlling costs, budget allocation, and monthly operations. The report on operations in month of August suggests a number of problems being faced in fulfilling the order including revenue being below budget, unfavorable production volume and labor cost variance and low profitability. Despite rising wages, Danshui Plant is finding it difficult to hire qualified labor required to complete orders of iPhones within deadline. Flexible-actual variance analysis reveals that possible causes for these issues might lie in the direct material flash memory variance and labor cost variance. In order to fulfill the contract within time and keep its reputation intact Danshui Plant needs to raise labor wages to hire enough qualified labor to volume up production and renegotiate selling price with Apple to cover the unfavorable labor cost variance.

## Following questions are answered in this case study solution

1. What role does Danshui Plant No. 2 play in the overall value chain surrounding this product line and contract? What’s the impact of that value chain on the strategic issues facing this plant? What seems to be the critical business issue the plant (and Wentao) is facing?

2. Calculate their budgeted cost per unit, then look at:

• What is the selling price?

• What is the gross margin? And the gross margin percentage?

• What do you think of this budgeting? Why would they budget so close to breakeven?

• What is their actual cost per unit?

• What is breakeven (in units)? Should 180,000 units show a profit or a loss?

3. Calculate a flexible budget:

• What are the flexible-actual variances?

• What do you learn from the flex-actual variances? - How does this story compare to Jianye Ma’s explanation?

4. Calculate these variances:

• Calculate the direct material variances for flash memories. Should they worry about flash memory cost?

• Calculate the direct labor variances. Is there a labor rate problem? Or a labor efficiency problem? Is this something that Danshui Plant No. 2 can resolve internally?

5. Assess and comment on the actual volume of work they’ve been doing, relative to expectations. Is this an issue? If so, how might they address it?

6. Conclude your analysis and assessment with some specific recommendations - WHAT SHOULD WENTAO CHEN DO?

## Case Analysis for Danshui Plant No 2

#### 1. What role does Danshui Plant No. 2 play in the overall value chain surrounding this product line and contract? What’s the impact of that value chain on the strategic issues facing this plant? What seems to be the critical business issue the plant (and Wentao) is facing?

The value chain of the iPhone 4 for Apple consists of suppliers, contract manufacturers, Apple, and customers in the order respectively. In the value chain of iPhone, Danshui is the contract manufacturer as it has to assemble components of iPhone 4. Since Danshui mainly competes on prices, low prices are its main source of competitive advantage. Danshui plant is used to manufacture electronic products for companies that aim to lower their labor costs as semi-skilled labor is available in southern parts of China at cheap rates. However, Danshui is in the middle of value chain for iPhone4 it has little control over material prices and quality since these parts are not manufactured by it but are sourced from suppliers. Therefore, in order to compete on the base of low price, the plant will have to focus on reducing labor costs and improving operational effectiveness.

The problems faced by Danshui plant that affect its ability to complete order of assembling iPhone 4 are not being able to meet production volume, suffering a loss, and not being able to hire skilled workers even after raising wages. Production has been lagging and they have been unable to fulfill their target of 200,000 units per month. This can be attributed to the fact they are unable to hire workers to take up production to 200,000 units a month even though they have raised wages by 30% since July. The revenue was below budget which was causing a loss of \$672,000 instead of a profit of \$100,000.  If these issues persist and Danshui is unable to achieve cost effectiveness and efficiency in operations, it might be unable to fulfill the contract within deadline and suffer a huge loss at the end of this contract. Moreover, its reputation and creditability in the market will be impacted.

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