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MBA 502 PART I MILESTONE TWO GUIDELINES AND RUBRIC

PRODUCTION AND COST

Lecturer: Greg Randolph

Linh Nguyen
1/25/2016

I.

THREE KEY INPUTS OF IPHONE PRODUCTION

1/ COMPONENTS AND MATERIALS
Components and materials used in the iPhone manufacturing process such as: touch
screen, chipsets, camera, battery, etc. These components were bought from many
suppliers such as Samsung, LG, Qualcomm, etc. These components materials used as
ingredients in an iPhone are considered as variable costs because they vary directly with
the number of iPhone that would be produced.

Figure 1: Apple iPhone 6S Plus costs to make. (Chmielewski, 2015)

2/ MANUFACTURING COST
This cost was paid to contract manufacturer (Foxconn). Apple Inc. orders
Foxconn to produce a number of iPhone under contract. For example: Apple has ordered
80 million units of the iPhone 6 4.7 inch and the iPhone 6S 5.5 inch. Foxconn is
expected to initially produce this number of product that have been ordered. (Alan, 2014)
The cost based on the number of products which has been ordered is a specific numbers.
However, the cost will increase if Apple Inc. wants to increase the number of products
that they wish the manufacturing partners to produce or vice versa. This cost is
considered as variable cost.
3/ RESEARCH AND DEVELOPMENT
According to its latest earnings report, Apple spent about $1.18 billion on
Research and Development. (Sherman, 2013)). R&D (Research and Development)
including iOS operating system and software, those were installed by default on the
iPhone before the product is sold in the market. It also including researches about
hardware such as screen, battery, camera, etc. Every iPhone is installed with same
software. This means that Apple does not have to pay more or less for R&D cost in case
they change the number of iPhones being produced. R&D costs is a fixed costs.
II.

ANALYSING THREE INPUTS OF IPHONE PRODUCTION

1/ COMPONENT AND MATERIALS
Over the years, Apple has pushed hard to decrease its reliance on third-party
companies for its iPhone and iPad components. IPhone alone makes up about 60
percent of the company's revenues. (Whittaker, 2015).Apples dependence on
suppliers is making trouble to them when suppliers want to raise prices for their

products. A typical example was in 2012, Samsung raised the price of iPhone chipset
supplied to Apple by 20%. Initially, Apple has refused, but because they could not
find alternative supplier, it should be accepted (the increase). Approving this contract
means that iPhone production costs would increase and affect the amount of iPhone
consumed. Besides getting more money from new contracts, Samsungs smartphone
will have a good opportunity to compete with iPhone- costs rose due to higher
production. This is absolutely not good for Apple and their products.
2/ MANUFACTURING COST
Foxconn is the manufacturing partner for the Apple iPhone. Cheap labor in China
and not having invest in factories help Apple cut down iPhone production costs.
3/ RESEARCH AND DEVELOPMENT
IOS is the operating system of the iPhone's top strengths compared with its
competitors. Besides the maximum support in the ecosystem that Apple has created
for their products. The program also prioritizes applications written for the iPhone
ahead of other operating systems.
The top concern of customers about a new phone is the battery life. (Versace, 2013)
This can be temporary resolved through updated OS versions. In a longer term, the
solution is a new battery technology. Both methods require investment in R&D. what
would happen if Apple introduce the next iPhone generation with a battery life of
more than 2 or 3 times compare to competitors products? Perhaps Apple will usher in
a new era as it unveiled the first generation iPhone in 2008. At the same time, it

would be a bad ending to their competitors. However, the same thing will happen to
Apple if its opponents can do that before them.
III.

DECISIONS
1/ COMPONENT AND MATERIALS
TSMC and Samsung are 2 suppliers who produce A9 chipset on iPhone 6s and 6s
Plus. This means Samsung is no longer the sole manufacturer and Apple have
alternatives choice if Samsung request to rise their chipset price. The competition
between the two providers can also help to reduce the cost of the chipset or not
increase unexpectedly.

Figure 2: Apple A9 chipset suppliers. (Zafar, 2015)

2/ MANUFACTURING COST
Outsourcing iPhone is an extremely attractive work for companies worldwide.
Therefore, Foxconn do not want to lose their contract to another company. Apple is such
an important customer for Foxconn, that the company has its chairman, Terry Gou,

overseeing production lines to make sure that everything is running smoothly.(Alan,

2014)
3/ RESEARCH AND DEVELOPMENT
IV.

Investing in R & D is a top priority in the iPhone production process.

REFERRENCES

Alan, F. (2014, July 28). Foxconn chairman Gou making sure production of Apple iPhone 6 goes
smoothly. Retrieved January 25, 2016, from http://www.phonearena.com/news/Foxconnchairman-Gou-making-sure-production-of-Apple-iPhone-6-goes-smoothly_id58703
Chmielewski, D. (2015, September 29). Apple's iPhone 6s Plus Costs an Estimated $236
to Make -- $749 to Purchase. Retrieved January 25, 2016, from http://recode.net/
2015/09/29/apples-iphone-6s-plus-costs-an-estimated-236-to-make-749-to-purchase/
Sherman, J. (2013, July 26). Spendy but indispensable: Breaking down the full $650 cost of the
iPhone 5. Retrieved January 25, 2016, from http://www.digitaltrends.com/mobile/iphonecost-what-apple-is-paying/
Versace, C. (2013, August 28). What Do Consumers Want In A New Smartphone? Retrieved
January 25, 2016, from http://www.forbes.com/sites/chrisversace/2013/08/21/what-doconsumers-want-in-a-new-smartphone/#7608a05947b3
Whittaker, Z. (2015, January 26). Apple to rely on Samsung chips for iPhone, iPad into 2015 |
ZDNet. Retrieved January 25, 2016, from http://www.zdnet.com/article/apple-stilldepending-on-samsung-for-iphone-chips-as/
Zafar, R. (2015, September 02). Apple A9 Percentages Show TSMC Getting Majority Of iPhone
6s Share. Retrieved January 25, 2016, from http://wccftech.com/iphone-6s6s-tsmcsamsung-percentages/