Question

CEG Ski Corporation has two main business segments: Ski boot production and wakeboard production. The wakeboard production division is currently considering purchasing the ski boots from an outside supplier for $45 per pair; however, they would like to see if they can negotiate a lower price with ski boot production line.

The ski boot division sells boots at a price of $65 per pair and incurs variable costs of $30 per pair. Their total factory capacity is 5,000 pairs.

1. If the ski boot division is currently producing 5,000 pairs for outside customers, would the two divisions be able to negotiate a price that would be agreeable to both parties? Why or why not? Show the acceptable price range, if any

2. If the ski boot division is currently producing 4,000 pairs and the wakeboard division would like to purchase 1,000 pairs, would the two divisions be able to negotiate a price that would be agreeable to both divisions? Why or why not? Show the acceptable price range, if any.

3. If the ski boot division is currently producing 4,500 pairs and the wakeboard division would like to purchase 1,000 pairs, would the two divisions be able to negotiate a price that would be agreeable to both divisions? Why or why not? Show the acceptable price range, if any.

Answer 1

Ans:

1.

Wakeboard production unit purchase price from outside supplier = $45 per unit.

Ski boot production cost per unit: $30

Ski boot production sell price per unit: $65

So if total capacity of Skiboot production is 5,000 units and it is selling its all units @ 65 per unit, both the divisions would not be able to negotiate a price that would be agreeable to both parties because maximum buying price for Wakeboard production can be $45 per unit and minimum selling price for Skiboot unit will be $65 per unit.

2.

In case Skiboot total capacity is 5,000 units and its current outside demand is 4,000 units, it can sell 1,000 units to wake board division at a minimum of $30 per unit (i.e. variable cost for eash unit to skiboot)

In that case maximum purchase price for wakeboard unit will still be $45 per unit.

Price range could be anything between $30 to $45 where both parties will be agreed to buy and sell.

3.

In case Skiboot total capacity is 5,000 units and its current outside demand is 4,500 units, it can sell 500 units to wake board division at a minimum of $30 per unit (i.e. variable cost for eash unit to skiboot) and other 500 at its regular selling price i.e $65 per unit (for compensate the reduction in outside sales by 500 units @$65 per unit) to maintain its current mimimum profit on current capacity of 4,500 units @$65 per unit.

In such a case minimum selling price for Skiboot to wakeboard production will be:

(500*$30+500*$65)/1,000 = $47.5

However maximum purchase price for wakeboard unit will still be $45 per unit.

So both parties would not be agreed to a price range which will be benificial for both under such circumstances.