Reference no: EM132471112

Warm Boots manufactures and sells a patented ski boot with 9-volt batteries designed to keep a skier's feet warm even when the outside temperature reaches -10 °Celsius. Warm Boots is organized into three divisions: Administration (accounting, finance, human resources, CEO, and CFO), Manufacturing, and Marketing and Sales. To promote cost efficiency, Manufacturing is treated as a cost center, where its manager is evaluated and paid a bonus based on minimizing the actual average cost of manufacturing boots in the week. The manager of Manufacturing has the discretion to choose its production level. Marketing and Sales (M&S) is treated as a profit center, where its profits are computed as the sales revenue it generates less the manufacturing cost of the boots.

• The manufacturing cost of the boots is the number of boots sold in the week times the actual average cost of manufacturing the boots in that week. The manager of M&S has the discretion to set the price per pair of boots and is paid a bonus based on M&S reported profits. The following table summarizes how price and total cost varies with the number of boots produced and sold PER WEEK. "Total Cost" includes both fixed and variable cost where the fixed cost is the annual fixed cost divided by 52 (the number of weeks in the year).

Required:

Question a. As the head of Manufacturing, how many boots will you manufacture if given the discretion to set production levels? Show calculations to support your answer.

Question b. If you managed the M&S Division of Warm Boots, and given the production level (and its resulting average cost) chosen by the Manufacturing manager in part a, what price (and quantity level) would you choose for a pair of boots that maximizes your bonus? Show calculations to support your answer.

Question c. Given the decisions of the Manufacturing and M&S managers in parts (a) and (b), is the firm maximizing profits? Explain why profits are or are not being maximized.