FOLEO FONES CASE STUDY - Chapter 6:

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 of SliFones that James has negotiated with Vodafone - the offer is for 6,000 phones at the discounted price of $760 each.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 the SliFone, 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 $75 per 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 the SliFone and then fit them to the electronics bodies.The variable costs consumed by this process are $168 per unit.The Casings unit has sufficient capacity to meet the current demand of the Screens unit, AND sell 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 complete SliFone.This process consumes $250 in 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 of SliFone to its telco customers for $796 per unit.The fixed overhead costs amount to 60% of the variable costs for each production unit.

(b) Based on the facts, is this offer to Vodafone in the best interests of the organisation? Why or Why not?

(HINT:Prove your answer with incremental analysis) (0.6 mark)

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(e) Calculate new transfer prices between the production units based on the General Rule.

(HINT:show all workings and equation) (0.5 mark)

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(f) Will these new transfer prices (calculated in part d) affect the likely decisions of the production unit supervisors?Explain.

(HINT:prove your answer again with incremental analysis for each production unit.)(0.9 mark)

Electronics Unit / Casings Unit / Screens Unit

Incremental revenue per phone

Incremental costs per phone

Variable costs

Transfer price

Contribution margin per phone