Foleo Accessories has 2 manufacturing processes required to produce the car cradles, undertaken by the Electronics and Casings departments. 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 $10 in variable costs per unit. The finished goods of the Electronics department are then passed through to the Casings department, who incurs an additional $6 in variable costs per unit to mould the cradle, fit the electronics and package the finished product. Once completed, the Casings department typically sells the car cradle to its end-user customers and other retailers for $30 per cradle. The Electronics department can also sell their products to an outside customer for $18 per unit. This external sale incurs an additional variable cost of $1 per unit for packaging.

1- Assume that there is spare capacity in the Electronics department. Use the general rule to calculate the transfer price for its product.

2- Assume that there is no spare capacity in the Electronics department. Use the general rule to calculate the transfer price for its product.

3- The Casings department received a special order for 4,000 car cradles at the discounted price of $25 each. While the Casings 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 Casings for this special order. To fulfill the order, Electronics has to forgo their external sales.

(a) Based on the facts provided, is this special order in the best interests of Foleo Accessories? Why?

(b) Calculate the transfer price between Electronics and Casings if it is based on variable cost plus 30%. Is it likely that the internal transfer will take place to fulfill the special order? Prove your answer with incremental analysis per unit for both internal and external sales for the Electronics department. (HINT: Compare the contribution margin between internal and external sales)

(c) Suggest a transfer price that is acceptable to both departments.