Question

The Trailer division of Baxter Bicycles makes bike trailers that attach to bicycles and can carry children or cargo. The trailers have a retail price of $100 each. Each trailer incurs $37 of variable manufacturing costs. The Trailer division has capacity for 26,000 trailers per year and incurs fixed costs of $580,000 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 9,200 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. 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?

Transfer pricing is used in cases when the goods are transferred or sold from one division to another in the given company, in case when one division is operating at full capacity, then the tranfer price in excess of the capacity to another division should be same as Market Price or retial price. The price is set to be maximum as it has to forgie its sells of outside customers to sell it to other division so o compensate, the market price is used.

Here The Trailer Division makes the bike trailers and sell them in the market @ $100 per unit. It has an total capacity of 26000 trailers which it is totally capable of sellling to the outside customer, so it is operating at full capacity so the transfer price should be the Maximum price i.e Retial price of $ 100 per trailer.

Thus  price should be used on transfers between Baxter Bicycles's divisions = $ 100 per trailer

2.  Assume the Trailer division currently only sells 9,200 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?

Now in case when the division is not operating at full capacity, and has ideal capacity, it should set the tranfer price which is the additional cost the division incurred to make that product, The additional cost is the variable cost, as fixed cost remains the same irrespective of the units produced, so in case of ideal capaicity variable cost should be the minimum price. Now with regards to the maximum it is the retail price it charge to the outside customers.

Here the Trailer division has a total capacity of 26000 trailers, of which it is selling only 9200 trailers to the outsiders, so it has an ideal capacity to the extent of 16800 trailers. Here the Assembly division requires,only 5700 trailers which is within the capacity, so the tranfer price should be between minimum variable cost and maximum retail price, i.e between $ 37 per unit to $ 100 per unit.

Thus the range of acceptable prices that could be used on transfers between Baxter Bicycles's divisions is $ 37 to $ 100.