Kindly assume the contribution margin from this article: The researchers at IHS
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Question
Kindly assume the contribution margin from this article:
The researchers at IHS have torn apart the latest iPhone 6 and concluded that it cost Apple around $200 to build. Given that an iPhone 6 with 16GB carries a retail price of $649, that means Apple will earn an astounding 69 percent on the phone before accounting for things like software, warranty and support costs. Perhaps more remarkable, though, is the consistency in that figure over the past several years. From the introduction of the iPhone 4’s through the 6, Apple’s phones have come to market with a build cost of between $195 and $207 while gaining capabilities every year. That this year’s model is around the middle of that range speaks to both Apple’s ability to manage its supply chain and also the relentless price declines of some key iPhone components as time passes.
Then and now
The 4’s, when it came to market 3 years ago in 2011, lacked many features of the current models. It didn’t have 4G LTE, lacked the TouchID fingerprint sensor and had just a 3.5-inch touchscreen. Still with a much less capable radio and much smaller display, the iPhone 4’s have direct cost of $196 to make. Of that, Apple was spending $19.20 on flash memory to store your pictures, music and apps and $9.10 on RAM to allow you to run those apps.
Move ahead to today and that $28.30 has been sliced to $15. With the extra $13,
Apple has been able to spend $8 more on the display ($45 vs. $37) and more on the processor ($20 vs. $15). Those two components provide many of the performance gains that have occurred over the past 3 years, allowing apps to run faster and, obviously, allowing you a better view of what you’re doing.
The positives (without many negatives)
Some major changes should allow Apple to capture even higher margins this year than in the recent past. While the 5.5-inch iPhone 6 Plus is unlikely to sell in anywhere near the volumes of the 6, it will capture many more margin dollars for every unit that moves. IHS says the incremental build cost is just $15.50, with half of that coming from the big screen and a bit from the optical image stabilization in the camera. Apple charges $100 more, of course, for the larger model.
That could mean that upselling to the Plus now overtakes what had been the most profitable part of the Apple empire: Upselling to larger amounts of storage on iPhones. In past years, Apple got an extra $100 to move you from 16GB to 32GB and then $100 more to go to 64GB. This year, the first $100 takes you all the way to 64GB.
With IHS speculating that Apple is paying 42 cents per gigabyte, that makes the cost of the extra flash $20.16. And the 64 to 128 upgrade runs Apple $26.88. Back in the 4’s days, those figures were $20 and $40. Apple makes more margin today offering you a boost from 64GB to 128GB for $100 than it did offering the upgrade from 32GB to 64GB back in 2011.
What’s especially noteworthy is that iPhone gross margins tend to be lower early in the new product cycle and improve late.
What next?
And that leads us to an important caveat about IHS’ numbers: They don’t include a true accounting of the engineering, capital expenditures, et al. that goes into making an iPhone. The total accounting cost of building is higher than it might appear just looking at the IHS data. Apple’s continued use of the chassis from the iPhone 5, for example, means that assembly partner Foxconn has now become quite adept at building that model and using the special equipment purpose-built to put it together. Moreover, the manufacturing process at Foxconn is highly automated resulting in almost negligible direct labor cost.
(7) Assume that the monthly fixed costs of iPhone 4’s are $50 million, how many units must Apple sell to attain a profit of $14 million? _____________________________ units
Explanation / Answer
= 141,281 units
Contribution per unit = Selling price per unit (-) variable cost per unit In case of Iphone 4 (16GB), Selling price per unit = $649 Variable cost per unit = $196 Contribution per unit = $649 - $196 = $453 Required contribution = Total Fixed Costs (+) Target Profit = $ 50,000,000 (+) $ 14,000,000 = $ 64,000,000 Units to be sold to earn required contribution = Required contribution Contribution per unit = $ 64,000,000 / $ 453= 141,281 units
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