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 both SliFones and its car cradle product that James has negotiated with one of Foleo Fones’ major business clients (Domino’s Pizzas). You are advised that Tracey has assessed the production of the extra SliFones as feasible, but asks you to look into the current manufacturing practices of Foleo Accessories to determine whether they should proceed with this deal for the car cradles. The offer negotiated by James, you are told, is for 4,000 car cradles at the discounted price of $19 each. As a result of your investigations and discussions with Robyn Smith, the Foleo Accessories Business Unit General Manager, you have discovered the following: Foleo Accessories has two (2) manufacturing processes required to produce the car cradles, undertaken by the Electronics and Plastics production units. These production units are both currently run as profit centers, so they 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 variable costs plus 10%. The Electronics production unit builds the circuitry and inner workings of the cradle, which consumes $8.00 in variable costs per unit. The finished goods of the Electronics unit are then passed through to the Plastics production unit, who mould the cradles, fit the electronics and package the finished product. This process consumes $3.00 in variable costs for Plastics, who currently have sufficient capacity to increase their output to accommodate the special offer. Once completed, the Plastics unit typically sells the car cradle to its end-user customers and other retailers for $25 per cradle. The Electronics production unit does not have sufficient capacity to supply the additional products to Plastics for the special offer. Currently the Electronics unit transfers sufficient output to Plastics to meet its existing demand, and then sells their remaining 4,000 car cradles to an outside customer for $10.50 per unit (which incurs an additional variable cost of 50c per unit for packaging).

(a) Draw a diagram that illustrates the relationships within Foleo Accessories and the current situation regarding the transfer of goods for the special offer to Dominos Pizzas. (HINT: Ensure you include the current transfer prices, sales prices and variable costs)

(b) Based on the facts provided, is this special offer to Domino’s Pizzas in the best interests of the organization?  Why or Why not? (HINT:  Prove your answer with incremental analysis per unit for the organization)

(c) Based on the cost + 10% transfer price, and knowing that the Plastics production unit needs to spend an additional 50c per cradle sold to the outside market, is it likely that the internal transfer will take place?  Why or why not? (HINT:  Prove your answer with incremental analysis per unit for both internal and external sales for the Electronics Unit.)