ACCG3001

Organisational Planning and Control

Session 1, 2020
Tutorial In-Class Exercise – Student Handout
WEEK 7
STUDENT NAME: SIANG KHIAN SIM SID: 45543011

TUTORIAL DAY / TIME: 12 PM THURSDAY TUTOR: NADINI

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 both SliFones and its car cradle product that James has
negotiated with one of Foleo Fones’ major business clients (Domino’s Pizzas). You are advised that Tracey has assessed the
production of the extra SliFones as feasible, but asks you to look into the current manufacturing practices of Foleo
Accessories to determine whether they should proceed with this deal for the car cradles. The offer negotiated by James,
you are told, is for 4,000 car cradles at the discounted price of $19 each.
As a result of your investigations and discussions with Robyn Smith, the Foleo Accessories Business Unit General Manager,
you have discovered the following:
Foleo Accessories has two (2) manufacturing processes required to produce the car cradles, undertaken by the Electronics
and Plastics production units. These production units are both currently run as profit centres, so they 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 variable costs plus 10%. The Electronics production
unit builds the circuitry and inner workings of the cradle, which consumes $8.00 in variable costs per unit. The finished
goods of the Electronics unit are then passed through to the Plastics production unit, who mould the cradles, fit the
electronics and package the finished product. This process consumes $3.00 in variable costs for Plastics, who currently
have sufficient capacity to increase their output to accommodate the special offer. Once completed, the Plastics unit
typically sells the car cradle to its end-user customers and other retailers for $25 per cradle. The Electronics production
unit does not have sufficient capacity to supply the additional products to Plastics for the special offer. Currently the
Electronics unit transfers sufficient output to Plastics to meet its existing demand, and then sells their remaining 4,000 car
cradles to an outside customer for $10.50 per unit (which incurs an additional variable cost of 50c per unit for packaging).

(a) Draw a diagram that illustrates the relationships within Foleo Accessories and the current situation regarding the
transfer of goods for the special offer to Dominos Pizzas.
(HINT: Ensure you include the current transfer prices, sales prices and variable costs) (0.5 mark)

External
market
SP = $25.00

Transfer
Electronics unit Price plastics unit Special offer
= $ 8.80
SP =
VC = $8.00 $19.00
VC = $3.00

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(b) Based on the facts provided, is this special offer to Domino’s Pizzas in the best interests of the organisation? Why or
Why not?
(HINT: Prove your answer with incremental analysis per unit for the organisation) (0.5 mark)

Revenue = $25.00
VC = $8.00 + $3.00
Total = $14.00 profit per unit

Yes, the special offer is in the best interest of the organisation as it a gain of $14.00 would be earned

(c) Based on the cost + 10% transfer price, and knowing that the Plastics production unit needs to spend an additional 50c
per cradle sold to the outside market, is it likely that the internal transfer will take place? Why or why not?
(HINT: Prove your answer with incremental analysis per unit for both internal and external sales for the Electronics
Unit.) (1 mark)

External sales of electronics unit = $10.50 – $8.50 = $2.00

Internal sales of electronics unit = $8.80 - $8.00 = $0.80

Internal transfer will not take place as the profit for the electronics unit for external sales Is more than compared to
internal sales

(d) Is this situation, described in part (c) good for the entire organisation? Why or why not?
(HINT: Prove your answer again with incremental analysis per unit for each production unit and for the organisation)

Electronic unit = $8.80 - $8.00 = $0.80

Plastic unit = $25.00-$3.00 - $8.80= $13.20
Profit for firm = $14.00
This is a good decision for the entire organisation as they will incur a profit from both units.

Calculate a new transfer price between the production units based on the General Rule.
(HINT: show all workings and equation)
($8.00+($10.50-$2.00-$0.50)*1.10 = $11.00

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(f) Will the internal transfer take place, based on the new transfer price calculated in part (e)? Explain.
(HINT: Prove your answer again with incremental analysis per unit for each production unit.) (1 mark)

External sales of electronics unit = $10.50 – $8.50 = $2.00

Internal sales of electronics unit = $11.0 - $8.00 = $3.00

Internal transfer will take place with the new transfer price

(g) Is this situation described in part (f) good for the entire organisation? Why or why not?
(HINT: Prove your answer again with incremental analysis per unit for the organisation.) (0.5 mark)

Electronic unit = $10.50 - $8.50 = $2.00

Plastic unit = $25.00-$3.50 = $21.50
Profit for firm = $22.50
This is a good decision for the entire organisation as they will incur a profit from both units.