Skiboards Inc. Has Two Divisions: The Boards Division 455556

Skiboards Inc Has Two Divisions The Boards Division Makes The Bo

Skiboards, Inc. operates with two divisions: the Boards Division and the Ski Division. The Boards Division manufactures the boards used by the Ski Division to produce Skiboards, but it also sells some of these boards to outside customers. In 2011, the Boards Division reported a selling price of $52 per board, variable costs of $22 per board, producing a total of 10,000 boards—8,000 sold to the Ski Division and 2,000 sold to outside customers. The sales to the Ski Division were made at the same price as outside sales. The Ski Division further processes these boards into Skiboards, incurring an additional variable cost of $100 per board, and sells the finished Skiboards for $300 each.

Required: (A) Prepare income statements for the Boards Division, the Ski Division, and for Skiboards, Inc. (B) Based on capacity constraints limiting the Boards Division to 10,000 boards and the Ski Division’s intent to buy 9,000 boards in the next year, determine whether it is more advantageous for the company as a whole to sell the additional 1,000 boards to the Ski Division or to external customers. Provide a comprehensive analysis in at least 200 words, supported by appropriate references.

Paper For Above instruction

The financial performance and decision-making processes of Skiboards, Inc. hinge significantly on understanding divisional profitability and capacity utilization. The company's structure involves an internal transfer of products, with implications for profitability at both division and corporate levels. This analysis will discuss the income statements for each division and evaluate the strategic decision regarding the additional boards within capacity limitations.

First, the income statement for the Boards Division must account for sales to external customers and the Ski Division, deducting variable costs from total revenues. For 2011, total sales amount to (8,000 + 2,000) boards multiplied by $52, totaling $520,000. Variable costs are calculated similarly, with 10,000 boards at $22 per board, totaling $220,000. Cost of goods sold includes the boards sold internally and externally, leading to a gross profit calculation. Supporting this, the internal transfer price impacts overall profitability, but for external reporting, the total revenues and costs form the basis of the division’s income statement.

The Ski Division’s income statement reflects the cost to shape the boards and the revenues from selling Skiboard products. With an additional variable shaping cost of $100 per board for 8,000 boards, costs amount to $800,000, and selling price at $300 results in revenues of $2,400,000, less the variable shaping costs and other operating expenses. The profit margins highlighted here guide strategic decisions for internal transfer pricing and capacity utilization.

The combined income for Skiboards, Inc., integrates the divisional performances, considering inter-divisional sales as internal transfers and external sales revenue. By consolidating the income statements, management can evaluate the profitability of the divisions both independently and collectively, informing strategic decisions about capacity and sales channels.

Regarding the decision to prioritize sales to the Ski Division, capacity constraints are pivotal. If the Boards Division has excess capacity, selling internally may be more profitable as the margins from internal sales contribute positively to overall profitability without impacting external revenue. Conversely, if capacity is limited, the company must assess whether the marginal contribution of additional internal sales exceeds external sales.

Analyses suggest that selling the additional 1,000 boards to the Ski Division would be favorable if the internal transfer price covers variable costs and adds to profit, since the marginal cost for additional boards would approximate the variable cost of $52 (price to external customers). However, it is essential to analyze overall contribution margins and capacity utilization to make an optimal decision for the company. If selling externally yields a higher contribution margin or if external market rates exceed internal transfer prices, then continued external sales may be prioritized.

In conclusion, the decision to divert capacity toward internal transfers or external sales depends on marginal profitability analysis and capacity constraints. Future strategies should consider detailed contribution margin analysis, capacity planning, and the potential for economies of scale within the divisions for optimal overall profitability.

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