Foleo Accessories has 2 manufacturing processes required to produce thecar cradles, undertaken by theElectronicsandPlasticsdepartments. These departments are both currently run as profit centres, so they are responsible for both their revenues and costs. The Electronics department builds the circuitry and inner workings of the cradle, which consumes$7in variable costs per unit. The finished goods of the Electronics department are then passed through to the Plastics department, who incurs an additional$4in variable costs per unit to mould the cradle, fit the electronics and package the finished product. Once completed, the Plastics department typically sells the car cradle to its end-user customers and other retailers for$25per cradle. Currently Electronics transfers sufficient output to Plastics to meet its existing demand, and then sells their remaining4,000units to an outside customer for$13per unit. This external sale incurs an additional variable cost of$1per unit for packaging.

Foleo Accessories needs to fulfill a special order for4,000car cradles at the discounted price of$19each. While the Plastics department has sufficient capacity to increase their output to accommodate the special order, the Electronics department does not have sufficient capacity to supply the additional products to Plastics for this special order. To fulfill the order, Electronics has to forgo their external sales, otherwise Plastics has to buy the required inputs from another external seller at$13per unit.

Based on the facts provided, is this special order in the best interests of Foleo Accessories? Prove your answer with incremental analysis per unit.

(HINT: Calculate the contribution margin per unit)

1

Calculate a new transfer price between the departments based on the General Rule (show your workings). Based on this new transfer price, calculate the contribution margin from the special order for each department. Is it likely that the internal transfer will take place to fulfill the special order? Why?