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In: Accounting

The Trailer division of Baxter Bicycles makes bike trailers that attach to bicycles and can carry...

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 $105 each. Each trailer incurs $33 of variable manufacturing costs. The Trailer division has capacity for 24,000 trailers per year and incurs fixed costs of $410,000 per year.

Required:
1. Assume the Assembly division of Baxter Bicycles wants to buy 5,100 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 10,000 Trailers to outside customers, and the Assembly division wants to buy 5,100 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?

1. Transfer price per trailer
2. Transfer price per trailer will be at least but not more than

Solutions

Expert Solution

Req 1: Transfer price per trailer 105
Reason: Transfer price will be variable cost i.e. $33 + contribution lost per unit i.e. $72 because each unit can be sold by trailer division to an outside customer. So any price below charging to customer will generate a loss for trailer division and to Baxter too.
Req 2: Transfer price per trailer will be at least $33 but not more than $105
Reason: Because due to excess capacity trailer division will not loose any contribution if it transfer 5100 units to another division. However it could not be more than the market price that is $105.
Note: Fixed cost of $410000 will continue to incur whether trailer division transfer to own division or sold outside customer. It is indifferent in both the situation hence ignored in decision making and transfer price calculation

ekkarill92 answered 2 years ago
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