Skiboards Inc. Has Two Divisions: The Boards Division Makes

Skiboards Inc Has Two Divisions The Boards Division Makes The Bo

Skiboards, Inc. operates through two divisions: the Boards Division and the Ski Division. The Boards Division produces skateboards that are used by the Ski Division to manufacture Skiboards, but it also sells these boards to external customers. In 2011, the division reported revenues from sales at a price of $52 per board, with variable costs of $22 per board. The division's production consisted of 10,000 boards, with 8,000 sold to the Ski Division and 2,000 sold externally. Sales to the Ski Division were made at the same price as sales to outside customers. The Ski Division incurs additional variable costs of $100 per board to shape the boards into Skiboards and sells the finished Skiboards at $300 each.

Part A requires preparing income statements for the Boards Division, the Ski Division, and Skiboards, Inc. Part B involves analyzing the capacity constraint of 10,000 boards and deciding whether the Boards Division should sell an additional 1,000 boards to the Ski Division or to outside customers, considering overall company profitability.

Paper For Above instruction

Introduction

In multi-divisional corporations such as Skiboards Inc., understanding the income contribution of each division and the overall company performance is essential for strategic decision-making. This analysis involves preparing segmented income statements, evaluating transfer pricing policies, and considering capacity constraints. The key question revolves around whether to prioritize internal transfer sales to the Ski Division or external sales to outside customers, given the capacity limitations of the Boards Division.

Part A: Income Statements

First, an income statement for the Boards Division considers sales to both the Ski Division and outside customers. The total output comprises 8,000 boards sold internally and 2,000 externally. Sales revenue from internal sales is 8,000 x $52 = $416,000, and from external sales, 2,000 x $52 = $104,000. Total sales revenue is $520,000. Variable costs include production costs of $22 per board, totaling 10,000 x $22 = $220,000. The division's contribution margin is $520,000 - $220,000 = $300,000. Deducting any fixed costs allocated to the division yields net income, which depends on the division's fixed cost structure.

Next, the Ski Division purchases 8,000 boards at $52 each, incurring an additional $100 in variable costs per board for shaping, and then sells the finished Skiboards at $300 each. Variable costs for shaping total 8,000 x $100 = $800,000. The Ski Division's revenue is 8,000 x $300 = $2,400,000. Its contribution margin can be calculated as revenue minus variable costs, i.e., $2,400,000 - ($800,000 + cost of boards purchased from the Boards Division). Fixed costs specific to the Ski Division should be considered for net income analysis.

For the consolidated company, the total income includes revenues from external and internal sales minus total variable costs, inter-divisional transfer prices, and fixed costs. The transfer price at $52 per board affects division profitability but may differ from the market price depending on internal policies.

Part B: Capacity and Strategic Decision

The Boards Division's capacity is limited to 10,000 boards annually. In the upcoming year, the Ski Division's planned purchase increases to 9,000 boards, leaving only 1,000 boards available for sale to outside customers. Conversely, if more boards are sold externally, higher revenues may be realized, but the internal transfer offers strategic benefits such as cost control and internal pricing policies.

Evaluating whether to prioritize internal transfer sales or external sales depends on marginal analysis. Selling 1,000 extra boards internally at $52 brings in $52,000 in revenue, but at the expense of foregoing external sales that could yield higher market prices or profits. Given the fixed costs and contribution margins, the company should favor the option that maximizes overall profitability.

Conclusion

In summary, preparing detailed income statements reveals the profitability of individual divisions and the overall company. Capacity constraints necessitate strategic decisions regarding internal versus external sales. The company must analyze contribution margins, fixed costs, and market conditions to optimize resource allocation and maximize shareholder value.

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