Can I setup a subcontract operation in a production order so that on delivery of the purchase order the production order is changed to Report as finished?

No you cannot, it is an operation, the RAF process still has to be run to book the finished item in, your PO may reflect what is ultimately the end item but you still need to complete the production step (I believe). Not sure it has changed in AX2012, sure it is true of AX2009.