Question

The trailers have a retail price of $102 each. Each trailer incurs $40 of variable manufacturing costs. The trailer division has capacity for 25,000 trailers per year and incurs fixed costs of $510,000 per year. Required: 1. Assume the assembly division of Baxter Bicycles wants to buy 5,700 trailers per year from the trailer division. If the trailer division can sell all of the trailers it manufactures to outside customers, what price should be used on transfers between Baxter Bicycles's divisions? 2. Assume the trailer division currently only sells 10,200 trailers to outside customers, and the assembly division wants to buy 5,700 trailers per year from the trailer division. What is the range of acceptable prices that could be used on transfers between Baxter Bicycles's divisions?

Answer 1

1.- $102 market price

2.- $40 minimum $102 market price maximum

Step-by-step explanation:

1.- If currently all the capacity of the trailer division is occupy then, the transfer price will be the market price as selling to the internal division denies a trailer to an outside customer

2.- as there is idle capacity it can sale for the marginal cost, the variable manufacturing cost of 40 dollars will be the minimum cost