INTRODUCTION DANSHUI Plant No. 2 is located in southern China was a contract manufacturer that assembled electronic products for companies wishing to save labor costs. DANSHUI was getting a one-year contract with apple Inc. to assemble 2. 4 million iPhones. It was very anxious when in the first three months of the contract, the plant is unable to be assembled as many as the expected and its operating at a loss. The plant has had difficulty hiring enough workers despite raising wages to 35%.
In addition, the process of assembling is complex and required almost entirely based on handwork by 325 workers, with 140 steps involving 100 components during 5 days. The DANSHUI controller considers preparing a “flexible budget” whether it is more useful to help them identify the misinterpreting their performance. Li also must analyze the currently static budget have been used and prepare a summary of monthly operations to identify what goes wrong in their operations that contribute to the performance problems.
If DANSHUI not analyzed the sources of problem and find the alternatives ways, it will contribute to disability in performing the contract and in the long term will lead to inefficiency of controlling the cost of materials, labor and overhead. This is in order to provide incentive to control all costs whether caused by use waste, damage theft or inefficiencies. ISSUE/PROBLEM DANSHUI Plant has faced an important issue, that is trying to solve the shortage of production line in the first three month and too caught up with the Apple IPhone 4 contract in the rest of the nine month.
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As we can know that after having report from the plant operation, DANSHUI Plant is not meeting with the targeted production line, with is shortage about 10% from the targeted amount. Although DANSHUI manage to produce up to 90% of the contract, but the shortage 10% has result DANSHUI to face loss about $672,000 rather than profit $100,000. For the first three month, DANSHUI have met the shortage of 10%. Therefore, DANSHUI Plant have to plan a strong strategic in order to catch up with the Apple iPhone 4 contract in the rest of the nine month.
If the contract amount is not reach during the end of the contract, DANSHUI Plant will bear much higher cost than revenue that will result loss to this plant. After study the situation, we also find out that labor force and labor cost have contributed to this issue too. For the labor cost, DANSHUI Plant has result over budget in labor cost. As compare to the budgeted, this figure is higher and yet the target production has not reached. By raise the labor cost around 30%, DANSHUI Plant will need to increase the production line to cover the increment.
And bear in mind that, DANSHUI only has nine months leave. Although DANSHUI Plant raises the labor price per hour, but we can observe that this did not help DANSHUI Plant to solve the shortage labor force much. Since DANSHUI Plant was built at the semi-skilled labor field, labor cost is cheap. DANSHUI Plant still cannot increase the number of labor force needed. The issue has contributed to the shortage in production line for the first three months. This is due to DANSHUI Plant is heavy rely on handwork by labor.
DANSHUI Plant raise the labor price is to hire the qualified labor force to push up the production line. As we noted that DANSHUI Plant has only nine months to ensure everything in targeted and also cover the difference at the early three months. As the production line is based on handwork, the component import is easy damaged. Large number of materials needs to replace from that. Therefore a high skilled level labor forces can help to reduce this problem. CONCEPTS AND STRATEGIES
Before proceed with the strategies or concepts, our group have analyzed the strengths and weaknesses of DANSHUI in order to know which strategy DANSHUI should go for. Based on the case, we know that DANSHUI strength is they has had the opportunity to get contract from Apple because of the trust and by having cheap labor cost that giving them an advantage compare to their competitor. While the DANSHUI weaknesses is the labor cost. DANSHUI wish to save the labor cost by paying their labor less than one dollar an hour.
They also have problem in finding enough qualified labor to match with their production even though they have raised their factory wages by almost 30% since July. This is why the plant is unable to assemble as many phones as expected and causes the operating at a loss. To overcome the problem regarding to the plant has performed so poorly in the three consecutive months, DANSHUI have to consider for strategic concept to enable the problems can be identified and resolved amicably.
To achieve this, DANSHUI can consider the breakeven analysis to determine when a business will be able to cover all its expenses and begin to make a profit. This break-even analysis will shows the amount of revenue that need to be bring in to cover the expenses before a dime of profit have been made. For example, if DANSHUI can attain and surpass their break-even point, which mean that if they can easily bring in more than the amount of sales revenue they need to meet their expenses, then their business stands a good chance of making money.
To perform a break-even analysis, DANSHUI have to make educated guesses about their expenses and revenues. Although DANSHUI did not have a crystal ball, they should do some serious research including an analysis of their market so that they can determine their projected sales volume and anticipated expenses. Based on the case, we know that DANSHUI is currently using the static budget to measure their performance. However, problem has occurred and the plant manager is considering using flexible budget to resolve the problem.
Flexible budget is based upon different levels of activity. It is a very useful tool for comparing actual costs experienced to the cost allowable for the activity level achieved. It is also adjusts the static budget for the actual level of output. For example, if DANSHUI factory actually produce 200,000 units, then managements should compare actual factory costs for 200,000 units to what the factory should have spent to make 200,000 units, not to what the factory should have spent to make 180,000 units or any other production level.
Furthermore, flexible budget distinguishes between fixed and variable cost, thereby allowing for a budget that can be automatically adjusted to the level of activity actually attained. In short, the flexible budget provides a better opportunity for planning and controlling than does a static budget. Furthermore, DANSHUI needed to apply the variance analysis to measure their business performance and to observe how well a business is performing and also how close actual costs and revenues are to expected costs and revenues.
In accounting, a variance is defined as the difference between the expected amount and the actual amount of costs or revenues. The purpose of this detailed information is to assist DANSHUI in determining what may have gone right or wrong and to help the company in future decision-making. RECOMMENDATION DANSHUI Company was in unfavorable performance by using standard cost budgeting system consequences of failing to achieve the 200,000 unit per month target. For the short term we recommend DANSHUI to change from using static budget system to the flexible budgeting system for evaluation process.
Before this, Li was using static budget system to evaluate the operation performance, but the evaluation are not comparing relevant information when the actual quantity iPhone assemble are differ from the budget (180,000 unit vs 200,000 unit). By using flexible budget system will help DANSHUI to compare the result with adjustable budget and the variance show will more accurate show the operation performance. Using the static budget show variance is unfavorable USD 772,000 compare with USD 688,000 in flexible budget system.
Flexible budget systems also prove the unfavorable performance caused by the variance from variable cost which is USD 1,041,200. Therefore can analyze and evaluate the weakness in controlling the variable cost which is flash memory, assembly and packaging expenses. In long term period, DANSHUI have to overcome shortage in skilled worker by buy or rent a machine to replacing the man power in assembly the iPhone. In assembly process will involve 140 steps and almost all steps are based on handwork and the worker shortage is a barrier to achieve the target.
With invest in new machine, DANSHUI can reduce the handwork task but have to appoint some skilled worker to operate the machine. Firstly, DANSHUI have to identify which step in operation can replace by machine. Then, find the relevant machine and analyze the price vs value. If they only want to use the machine for temporary, it is better for DANSHUI to rent rather than buy the machine. Other than that, DANSHUI can hiring more skilled staff or increase the total staff to assemble the 200,000 unit iPhone per month.
DANSHUI must fulfill the contract with producing 2. 4 million in one year for the good relationship with Apple and for getting contract in future. Apple product also had good demand in current and future market, therefore DANSHUI have to take this opportunity to be the sub manufacture for Apple. In process getting new staff, DANSHUI also must maintain their existing staff because the existing staff already gain experience in 3 month operation of assembly iPhone 4 by increasing reward system.
After getting the sufficient staffs, DANSHUI have to increase the monitoring and controlling system to reduce the reject product and also repairing cost. CONCLUSION As to wrapping up the discussion, we know that DANSHUI has had difficulty hiring enough workers despite raising wages to 35%. DANSHUI Plant has faced an important issue, that is trying to solve the shortage of production line in the first three month and too caught up with the Apple iPhone 4 contracts in the rest of the nine month.
After having report from the plant operation, DANSHUI Plant is not meeting with the targeted production line, with is shortage about 10% from the targeted amount. Although DANSHUI manage to produce up to 90% of the contract, but the shortage 10% has result DANSHUI to face loss about $672,000 rather than profit $100,000. Therefore, we think that DANSHUI should do an analysis about company strengths, weakness and the opportunities and threats that DANSHUI might face in the future. Instead of doing the breakeven analysis, DANSHUI can consider using flexible budget to resolve the problem.
DANSHUI needed to apply the variance in order to assist DANSHUI in determining what may have gone right or wrong and to help the company in future decision-making. For the short term period, we recommended DANSHUI to change from using static budget system to the flexible budgeting system for evaluation process. DANSUI have to overcome shortage in skilled worker by buy or rent a machine to replacing the man power in assembly the iPhone for the long term period and in the same time, DANSHUI can hiring more skilled staff or increase the total staff to assemble the 200,000 unit iPhone per month as well .
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