Assume you are the management accountant for the Foleo Group and have been called to a meeting with James and Tracey, the CFO, regarding the assessment of a special offer for the premium model ofSliFonesthat James has negotiated with Vodafone - the offer is for 6,000 phones at the discounted price of$760each.You have been asked to work with Allan Raymond, the Foleo Fones Business Unit General Manager, and look into the current manufacturing practices, with the view to determining whether Foleo Fones should proceed with this deal.

As a result of your investigations and discussions with Allan, you have discovered the following:

Foleo Fones has three (3) manufacturing processes required to produce theSliFone, which are undertaken by the Electronics, Casings and Screens Production Units.These production units are all currently run as profit centres, so are responsible for both their revenues and costs.The output of each process becomes the input (or raw materials) for the next process, and a transfer price between these production units has been set based on absorption costs plus 10%.The Electronics unit builds the circuitry and body of the inner workings of the phone and their variable costs amount to$75per unit.They currently have sufficient spare capacity to cope with the increased production that would result from accepting this offer.The finished goods of the Electronics production unit, the body of electronics, are then passed through to the Casings unit, which manufactures the outer cases for theSliFoneand then fit them to the electronics bodies.The variable costs consumed by this process are$168per unit.The Casings unit has sufficient capacity to meet the current demand of the Screens unit,ANDsell a further 6,000 of its products to an outside customer for$385, however it will have to forego these external sales in order to supply the output required for the special offer.The output of the Casings process (i.e., the encased electronics item) is then passed through to the Screens production unit, which processes and cuts laminated glass, then fits it to the now completeSliFone.This process consumes$250in variable costs and the Screens unit currently has sufficient capacity to increase its output to supply the required phones to Vodafone.The Screen production unit then normally sells the premium model ofSliFoneto its telco customers for$796per unit.The fixed overhead costs amount to 60% of the variable costs for each production unit.

1. Based on the facts, is this offer to Vodafone in the best interests of the organisation? Why or Why not?
2. Based on the absorption cost + 10% transfer price, and knowing that each production unit will want to maximise their profits, will the Electronics, Casings and Screens Supervisors be in favour of accepting the Vodafone offer?Why or Why not?

(HINT:Prove your answer with incremental analysis for each production unit)(1.2 marks)

Incremental revenue per phone Electronics Unit Casings Unit Screens Unit Incremental costs per phone Variable costs Transfer price Contribution margin per phone