Question

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 Smith’s 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 Foleo’s 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 Foleo’s 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 Foleo’s 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 Group’s 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.

Identify the stakeholders who would be affected if the above proposal to relocation of the Foleo Group’s manufacturing operations was approved and explain how each would be impacted.

(HINT:  You should identify at least four stakeholders and explain the impact on each of them.)                 (0.8 mark)

(Award 0.2 mark for each pair of identified stakeholder and impact explanation up to a maximum of 0.8 mark)

Answer 1

The stakeholders who would be impacted by the relocation decision of Foleo Group are as under:

1. Shareholders: For the shareholders and investors, the relocation decision promises a better return on investment, since it results in a lower cost of production (as indicated by reduction in material costs, labor costs, operational expenses and fixed overheads) and therefore a higher profitability. Hence, this would raise investor sentiments towards the company, purely on financial terms.
2. Employees: While the decision seems lucrative on financial grounds, the decision will not only lead to loss of employment for several workers, but will also make the workers of the Guangzhou Plant work in an exploitative manner (as indicated by the fact that they will be working for 50 out of 52 weeks in a year).
3. Society: The decision leads to a reduced standard of living for the citizens, as indicated by higher wastage of precious resources, but also significantly higher CO2 emissions per hour.
4. Suppliers: Relocation of the plant may involve changing the suppliers (preferably local suppliers to avoid additional material trasnport costs). This would result in loss of business opportunity for several existing suppliers, who might be solely relying on these business orders to maintain their cash flows. Changing the suppliers may even cause them to shut down their operations.

In case of any questions or clarifications on the above workings, please share the same in the comments section.

All the best!