Question

2. You are the operations director for Apple, and have to make decisions about the next-generation iPhone 9 that you are developing and hope to release in late 2020. Let’s put all of your operations skills together to figure out how to succeed here.   First, let’s look at some actual company data:

Cost of making iPhones: a. material cost: $220/phone in components, b. labor costs $5/phone for worker assembly, c. overhead costs: the company also spends $15 million per year for electricity, $60 million per year for factories, and $500 million per year in research and development (R&D).

Year    iPhone sales

(# of phones)

2014    125,000,000

2015    150,000,000

2016    169,000,000

2017    231,000,000   

2018    212,000,000

a) What was Apple’s iPhone productivity in 2018?

b) By what % would productivity increase if your supply chain team reduced per-phone component costs by $10?

Answer 1

a)

Productivity in 2018 = Total sales in 2018 / Total costs in 2018

Total sales in 2018 = 212,000,000

Total Cost = Total Material Cost + Total Labout cost + Total overhead cost

Total Material cost = 220 x 212000000 = $ 46,640,000,000

Total Labor cost = 5 x 212000000 = $ 1,060,000,000

Total Overhead cost = 15000000 + 60000000 + 500000000 = $ 575,000,000

Therefore,

Total Cost = 46,640,000,000 + 1,060,000,000 + 575,000,000 = $ 48,275,000,000

So,

Productivity in 2018 = 212,000,000 / 48,275,000,000 = 0.0044 phones / Dollar

This means for every dollar spend, 0.0044 phones were sold.

b)

New Material cost per phone = 220 - 10 = $ 210

Total Material cost = 210 x 212000000 = $ 44,520,000,000

Labor costs and Overhead costs shall remain the same.

Therefore,

Total costs = 44,520,000,000 + 1,060,000,000 + 575,000,000 = $ 46,155,000,000

New Productivity = 212,000,000 / 46,155,000,000 = 0.0046 phones / Dollar

Percentage increase in Productivity = (0.0046 - 0.0044) / 0.0044 = 0.0002 / 0.0044 = 0.04545 = 4.545 %