FOLEO FONES CASE STUDY Chapters 12&13:

Assume you are the management accountant for the Foleo Group. After her meetings with the various business units, Tracey Chen has identified a number of opportunities for the organisation to improve its sustainability performance. One such opportunity is Robyn Smiths suggestion for moving the manufacturing operations of Foleo Fones and Accessories off-shore to address the local residents concerns. Robyn had done some research and has supplied Tracey with the below data relating to the relocation of Foleos manufacturing plants offshore (specifically to Guangzhou in southern China).

	Australian Plants	Guangzhou Plant
Annual Direct Labour Costs	$1,953,315	$1,074,323
Annual Direct Materials Costs	$2,976,480	$1,785,888
Annual operational expenses (Variable Manufacturing Overheads)	$343,440	$120,204
Annual waste produced from operations requiring disposal	710 tonnes p.a	825 tonnes p.a
Cost of waste disposal per kg	$120 per tonne	$110 per tonne
Annual fixed manufacturing overheads	$625,000	$375,000
Average / estimated delivery time for SliFones and Accessories	5 working days	35 working days
Estimated CO2 emissions produced by operations per hour of operation	260 grams per hour	430 grams per hour
Number of employees required by manufacturing operations	1,450	1,250
Number of working weeks per year per employee	40 weeks	50 weeks

Robyn has advised Tracey that the expected relocation costs to Guangzhou would amount to $1,500,000 but that some of these costs could be offset with the sale of Foleos current manufacturing assets and the sublease of the plants (the amount of which, she has estimated as an inflow of $950,000 at the time of the relocation).

As mentioned above, the relocation of Foleos manufacturing operations will mean the closure of the Australian plants, which will result in all factory workers currently employed at the various Foleo plants being laid off. More than half of these workers have been with Foleo for at least 10 years and many of them have not claimed their accrued long service and annual leave. Tracey has calculated that these workers entitlements, which must be paid on their termination, will amount to $6,400,000. Whilst the cost savings look good on paper, Tracey has some concerns about the merit of this proposal in terms of its alignment with the Foleo Groups overarching objectives and the newly formulated sustainability objectives. She is also concerned about relinquishing control over the manufacturing process and how this will impact the quality of the products being produced and ultimately customer satisfaction.

Tracey has asked you to analyse this data and report back to her with a recommendation that she can take to a meeting with Robyn Smith and Allan Raymond for further discussion.

(a) Using the above financial data, prepare a comparison in the space provided, of the financial costs and benefits over the next five (5) years of both options (i.e. relocating the Foleo manufacturing operations and maintaining the current operations here in Australia). Then rank the two (2) options based on the net financial benefits or costs you have calculated. (2 marks)

(HINT: Include only the financial costs/benefits in this comparison and ignore the time-value of money.)

Costs / Benefits		Maintaining Australian Operations			Relocating Operations to China
		Year 0	Years 1-5	TOTAL	Year 0	Years 1-5	TOTAL
Initial outlay for the relocation of operations to China
Estimated inflow of funds from sale of assets and subleasing plants
Annual Direct Labour Costs
Annual Direct Materials Costs
Annual operational expenses (Variable Manufacturing Overheads)
Annual waste produced from operations requiring disposal
Annual fixed manufacturing overheads
Payout of entitlements to Australian factory workers
TOTAL NET FINANCIAL COST / (BENEFIT)

(b) Using the non-financial data provided by Robyn Smith, summarise and briefly discuss the environmental and social costs/benefits over the next five (5) years of both options. Then rank the two (2) options based on the non-financial benefits or costs you have discussed.

(HINT: Include only the non-financial (or physical) measures in this analysis and explain whether your suggestions are costs or benefits to society or the environment. Include at least four (4).)