Q1) Creative Auto is a large multinational corporation. For segment reporting purposes, the company has two businesses: production of motor vehicles and information processing services.

The motor vehicle business is by far the larger of Creative's two segments. It consists mainly of domestic U.S. passenger car production, but it also includes small truck manufacturing operations in the United States and passenger car production in other countries. This segment of Creative has had weak operating results for the past several years, including a large loss in 1996. Although the company does not reveal the operating results of its domestic passenger car_ segments, that part of Creative's business is generally believed to be primarily responsible for the weak performance of its motor vehicle segment.

Idata, the information processing services segment of Creative, was started by Creative about 15 years ago. This business has shown strong, steady growth that has been entirely internal; no acquisitions have been made.

An excerpt from a research report on Creative prepared by Paul Adams, a CFA candidate, states: "Based on our assumption that Creative will be able to increase prices significantly on U.S. passenger cars in 1997, we project a multibillion dollar profit improvement."

c.Discuss how product pricing should differ between Creative's two businesses, based on the location of each in the industrial life cycle.