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FOLEO FONES CASE STUDY Chem 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 Slit-"ones 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 SllFone, 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 Sill-"one and then t 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 ofthe Screens unit, AND sell a further 6,000 of its products to an outside customer for 5385, 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 ts it to the now complete SllFone. 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 SllFone to its telco customers for $796 per unit. The fixed overhead costs amount to 60% ofthe variable costs for each production unit. {a} Draw a diagram that illustrates the relationships within Foleo Fones & the CURRENT situation regarding the transfer of goods for the special offer to Vodafone. (HlN T: Ensure you include the current sales price, variable costs and calculated transfer prices} (HlNT: Ensure you include any transfer price paid to another entity as variable or outlay cosh in your calculations) (HlNT: Round up or down as appropriate to whole dollars for this exercise} (0.2 mark} (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) (c) Based on the absorption cost + 10% transfer price, and knowing that each production unit will want to maximise their profits, will the Electronics, Casings and Screens Supervisors be in favour of accepting the Vodafone offer? Why or Why not? (HINT: Prove your answer with incremental analysis for each production unit) (1.2 marks) Electronics Unit Casings Unit Screens Unit Incremental revenue per phone Incremental costs per phone Variable costs Transfer price Contribution margin per phone (d) Does this transfer price achieve goal congruence? Why or Why not? (0.6 mark) (e) Calculate new transfer prices between the production units based on the General Rule. (HINT: show all workings and equation) (0.5 mark)
