CEG Ski Corporation has two main business segments: Ski boot production and wakeboard production. The wakeboard production...

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.

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.

Expert Solution

Solution : The given problem relates to Transfer Pricing. In the current issue, CEG Ski Corporation has two business segments: Ski Boot Production and wakeboard Production. The Wakeboard production is in need of Ski Boots, outside supplier price fixed at $ 45 per pair. However, Ski Boot Prodution sells to its outside customers at $ 65, having Variable cost of $30 per pair. The Division Ski Boot Production is not operating at full capacity and unused capacity exists in that division, it can produce sufficient number of ski boots to be delivered to wakeboard Production without affecting its external supplies to outside customer. By this, overall profitability of the company will increase. As the Wakeboard is not required to spent $ 45, instead now the comapny will be able to save $15 per Ski Boot, and it will be divided between these segments as how they negotiate better.

Acceptable range would be $ 30 to $ 45 (Minimum would be Variable cost to Ski Boot Production and Maximum price would be outside supplier price).

ekkarill92 answered 2 years ago

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