Analyzing Foxconn's Profitability and Improvement Ideas

The assignment is about analyzing the profitability of Foxconn's iPhone manufacturing and considering moving some or all of its iPhone manufacturing to the United States. The first part requires calculating the total gross profit for each iPhone, contribution margin per unit, and analyzing the profitability of the Foxconn factory. It also involves calculating the break-even point in units and dollars and the number of phones that need to be sold to achieve a target operating profit. The second part requires writing a report on whether Apple and Foxconn should move some or all of its iPhone manufacturing to the United States, considering the costs and benefits of doing so. Finally, the third part involves reflecting on the experience of completing the assignment, including thinking about the processes used, what helped or got in the way, and what was learned.

QUEENSLAND UNIVERSITY OF TECHNOLOGY
QUT Business School
School of Accountancy
AYN414 Cost and Management Accounting
SEMESTER ONE 2018
ASSESSMENT ITEM 2: Written Assignment
(Weighting Total: 20%)
Due Date and Time: Wednesday 18th April 2018 @ 5pm
Submission: Submission via Blackboard – see the Assessment area
of the AYN414 Blackboard site
Length: 1,000 words (+/- 10% AND excluding references)
Team or Individual: Individual
This assessment item assesses the following learning outcomes:
Knowledge and Technical Skills (KS)
1.1 Demonstrate and apply integrated and advanced discipline and professional practice knowledge,
including knowledge of relevant research principles and methods.
Higher Order Thinking Skills (HO)
2.1 Critically investigate real world business issues and problems drawing on analysis, evaluation and
synthesis of discipline knowledge, including theory and practice.
Professional Communication (PC)
3.1 Use information literacy skills and communicate effectively and professionally in written forms and
using media appropriate for diverse purposes, contexts and audiences.
Teamwork & Self (TS)
4.1 Exercise self-reflection and accountability in applying knowledge and skills for own learning and
effective practice.
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Apple & Foxconn
You are a management accounting working at Apple. Your manager, Lucy Zhang, has asked you to gather
information on the profitability of one of the factories that manufacture iPhones. Apple is considering
the financial implications of moving the manufacture and assembly from one of its small factories in
China to the U.S. The management of Apple is having a meeting with Foxconn – Apple’s current
contracted manufacturer - in one week and they need some high-level numbers to take to the meeting
on the financial consequences of moving the manufacturing and assembly process to the U.S state of
Wisconsin. You have been given some information from Foxconn on the costs of manufacture/assembly
but this is not in the detail that you would have preferred. Your boss can’t wait for the detailed costs
from Foxconn and needs some general figures to guide their initial discussions and has told you to make
your own judgements where you are missing figures. She has also said these costs are from a small
Chinese factory that has just started manufacturing in the last couple of months. You will have to make
some professional judgements where you do not have all the information you need.
Foxconn Technology Group (FTG) is a Taiwanese multinational company that manufactures electronic
products and is contracted by Apple to manufacture many of its products such as the iPhone, and iPad.
Foxconn has factories in Asia, Brazil, Europe, and Mexico and together these factories produce
approximately 40 percent of the consumer electronics products sold worldwide. Most of these factories
are in China where Foxconn currently employs over a million people. ‘Foxconn's largest factory
worldwide is in Longhua Town, Shenzhen, where hundreds of thousands of workers (varying counts
include 230,000, 300,000, and 450,000) are employed at the Longhua Science & Technology Park, a
walled campus sometimes referred to as “Foxconn City”. Covering about 1.16 square miles (3 square km),
it includes 15 factories, worker dormitories, 4 swimming pools, a fire brigade, its own television network
(Foxconn TV), and a city centre with a grocery store, bank, restaurants, bookstore, and hospital. While
some workers live in surrounding towns and villages, others live and work inside the complex; a quarter
of the employees live in the dormitories, and many of them work
up to 12 hours a day for 6 days each week’1.
Labour costs in China are much cheaper than many other countries
although they have been recently increasing, with the average
hourly wages around $3.60 in 2016 an increase in 64% since 2011.
These hourly rates are still ‘more than five times hourly
manufacturing wages in India, and [are] more on par with countries
such as Portugal and South Africa’2.
Key to the success of Apple is a business model that combines a luxury brand marketing and pricing
strategy with low-cost production and assembly through outsourcing the manufacturing component of
the value chain. This has been a very successful strategy that has ensured Apple’s profits have continued
to increase across its product range.
Apple has used Foxconn to manufacture its products in China including its most profitable product- the
iPhone.
1 https://en.wikipedia.org/wiki/Foxconn. Accessed 3/8/17
2 https://www.cnbc.com/2017/02/27/chinese-wages-rise-made-in-china-isnt-so-cheap-anymore.html. Accessed 3/8/17
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Source: Businessinsider.com.au

Recent iPhone’s assembled by Foxconn China include:
 The iPhone 5s
 The iPhone 6
 The iPhone 6 Plus.
Details relating to the assembly costs of Apple’s three iPhones are as follows:
Figure 1: Summary of iPhone costs
Source: teardown.com
iPhone 5s
The 5s comes with a touchscreen display it is powered by 1.3GHz dual-core Apple A7 (64-bit ARMv8)
processor and has two cameras - a primary camera on the rear and a secondary camera for selfies. The
Apple iPhone 5s runs iOS 7 software and is powered by a non-removable battery. Foxconn assembles the
iPhone 5s from materials provided by other suppliers. The main components include the display/touch
screen, memory, camera and battery (there are other misc components).
The production process involves machine automation (robots manufacture the external case) and
manual workers who assemble the rest of the phone and test it is working. The robot is operated by a
machine operator and it takes on average 10 minutes of machine time to make one base of the iPhone
5s. The phone then moves to assembly where the factory assembly workers complete the assembly
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adding components such as the memory, camera battery and the display/touch screen and finally it is
tested.
iPhone 6
The iPhone 6 has a larger 4.7” HD screen and a new A8 chip processor and new isight camera. Production
follows a similar process as for the 5s. The production process involves machine automation (robots
manufacture the slimline external case) and manual workers who assemble the rest of the phone and
test it is working. The robot is operated by a machine operator and it takes on average 20 minutes for
the robot to make the base of one iPhone6. The phone then moves to assembly where the factory
assembly workers complete the assembly adding components such as the memory, camera battery and
the display/touch screen and finally it is tested.
The iPhone 6 plus
The iPhone 6 plus has a larger again 5.5” HD screen and the new A8 chip processor. The camera is 8
megapixels. Production follows a similar process as for the iPhone 6. The production process involves
machine automation (robots manufacture the slimline external case) and manual workers who assemble
the rest of the phone and test it is working. The robot is operated by a machine operator and it takes on
average 30 minutes for the robot to make the base of one iPhone6. The phone then moves to assembly
where the factory assembly workers complete the assembly adding components such as the memory,
camera battery and the display/touch screen and finally it is tested.
During the 2016-17 financial year, the price Foxconn is paid for manufacturing each iPhone is below:
- the iPhone 5s was $250;
- the iPhone 6 was $267; and
- the iPhone 6 plus was $282.
Additional Accounting information
After a meeting with your boss Lucy Zhang, you have obtained the following information regarding for
the year ending 30 June 2017.
Revenue $
iPhone 5s 1,541,520
iPhone 6 1,233,857
iPhone 6plus 1,061,616
Number of phones manufactured
(budget)
iPhone 5s 6,420
iPhone 6 4,800
iPhone 6plus 3,900
Number of phones manufactured
(actual)
iPhone 5s 6,440
iPhone 6 4,840
iPhone 6plus 3,840
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Raw material costs
A breakdown of the raw material costs for each phone has
been given in Figure 1. Some of these are direct and some
might be better classified as indirect. You will need to
decide how to break up these costs.
Labour costs $ per hour
Machine Operators
Factory Assembly Line
3.90
3.69
Total number of machine hours Machine hours
(budgeted and actual)
iPhone 5s 1,070
iPhone 6 1,600
iPhone 6plus 1,950
The following information relates to other costs incurred by Foxconn for the year ended 30 June 2017
(these costs cannot be traced easily to any particular iphone:
$ $
Budget Actual
Accounting fees 2,600 2,640
Advertising costs 2,000 2,300
Consumables – production facility 36,000 32,700
Depreciation – robot machinery 4,000 4,000
Depreciation – office equipment 4,500 4,500
Depreciation – office furniture 1,600 1,600
Insurance 4,500 4,500
Robot design costs 50,000 72,000
Rental – office 15,000 15,000
Rental – production facility 12,000 12,000
Research and development - robots 15,700 17,800
Salaries – Administrative staff 25,000 25,000
Salaries – Executive management 70,000 70,000
Salaries – Production supervisor 30,000 30,000
Salaries – Factory quality inspector 25,000 25,000
Other expenses 4,850 4,970
Utilities – water and electricity 10,425 14,250
Warranty costs 4,950 7,800
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At a brief meeting to discuss the project, Lucy was able to provide clarification on some of these costs:
1. The insurance cost relates to all of Foxconn’s equipment. Based on the sum insured, 60% of this
relates to production equipment, with the remaining 40% for office equipment and furniture;
2. Depreciation is calculated on a straight line basis. All equipment, machinery and furniture is
expected to have a useful life of seven years;
3. All salary employees (not manufacturing workers) are paid a fixed amount each month. These are
based on permanent contractual agreements that cannot be changed in the short run;
4. Utility costs (for water and electricity) are for the company as a whole. However, most of this
(75%) relates to the production processes and varies in proportion with the number of iPhones
produced. The remaining 25% is for the administration and selling areas, and do not vary with the
level of production;
5. Warranty costs are related to the number of iPhones returned by Apple due to faulty production;
6. There was no Finished Goods inventory at the beginning of the financial year, and no Work-in-
Process at either the beginning or the end of the financial year;
7. ‘Other expenses’ relates entirely to various minor costs incurred in administration, and do not
vary with the level of production. Consumables of the production facility however, do vary with
the level of production;
8. The company applies manufacturing overheads to products using a predetermined overhead rate
that was calculated from budgeted manufacturing overheads and using budgeted machine hours
as the cost driver. Although actual cost information for the whole year is now available, Lucy
would like you to use the same method for applying manufacturing overheads as she believes the
budgeted figures are more relevant for the forthcoming year;
9. In your calculations you can write-off any over or under-applied manufacturing overhead as a
cost of goods sold. This amount does not need to be allocated to the three products.
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TASK – Lucy Zhang, your boss at Apple has asked you to provide her with a report on
Foxconn’s current business profitability and improvement ideas. You are required to:
PART A (10 marks)
(1) Analyse the profitability of the three products. In order to do this you will need to:
a. Calculate the total gross profit for EACH phone then the total gross profit of the three
products. Indicate which product is the most profitable;
b. Calculate the contribution margin per unit for each of the three;
6 marks
(2) Analyse the profitability of the Foxconn factory. In order to do this you will need to:
a. Calculate the break-even point in units and dollars, assuming the current sales mix;
b. Calculate the number of phones that need to be sold in order to achieve a target operating
profit for Foxconn of $250,000 (assuming the current sales mix);
4 marks
PART B (5 marks)
In July 2017 Foxconn announced it would build a factory in Wisconsin, United States to produce flat-
screen displays. It is now considering whether it should also move some or all of its iPhone
manufacturing to the US. You need to write a report that will provide an answer to the following
questions:
(1) Should Apple & Foxconn move some or all of its iPhone manufacture to the United States?
Consider the costs and benefits of moving manufacturing from China to the US. These will only
be estimates of the costs and benefits for Foxconn/Apple of doing this. You can rely on the
figures you have calculated as the basis of this report.
(2) What other qualitative factors are going to be important in making this decision? You should also
consider what changes are being made in manufacturing and what implications this will have on
future manufacturing costs for iPhones.
References
You should reference any textbooks, websites, newspapers or reports that you use to answer these
questions. Check the correct referencing to use as outlined by QUT’s citewrite guide.
http://www.citewrite.qut.edu.au/
Presentation of Report (Part B)
You will need to consider how you present this report as you will be marked on your communication.
Part A should be answered using excel (with workings) and then the final answers summarised in your
report. Part B and C can be answered in any format that you decide. You will need to upload your
reports and excel spreadsheet via turnitin.
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5 marks
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PART C (Individual submission) (5 marks)
A successful accounting professional uses the idea of self-reflection to improve their skills in the
workplace. Reflecting on your experience of completing this assignment, write a self-reflection that puts
into writing your learning experiences. You should think about the following questions to help you in this
task:
1. What processes did you use to complete the assignment? That is, HOW did you go about
answering these questions, and how did you decide how to build your spreadsheet?
2. What exactly helped or got in the way of you being able to complete your assignment?
For example, did you feel like you had a sound knowledge base of the key topics before your
started or did this assignment show you how much you had not grasped?
3. What parts really presented problems for you? For example, did you get really stuck – what did
you do at these times? For example, sought help from fellow students/study group, looked at
different text books? (while this is an individual assignment and your final work must be your
own you can discuss your problems/ideas with classmates however make sure you do NOT hand
in anything other than your own work).
4. How much time did you take to complete the assignment – was this more or less than you
expected? Has your time management for this assignment been successful? How could you
improve next time?
5. What have you learnt doing this assignment and what would you do differently next time?
5 marks
TOTAL MARKS : 20 marks
References:
Horngren, C.T., Datar, S.M., Rajan, M.V., Wynder, M., Maguire, W. & Tan, R. (2014). Cost Accounting: A
Managerial Emphasis (2nd ed.). Frenchs Forest, NSW: Pearson Australia.
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