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Answer :
Answer: $107
Explanation:
When a division is able to sell all of its products to consumers outside the company, the transfer price within the company should be at the same price that the good would be sold to outside consumers.
This is to ensure that the division does not suffer an economic loss by selling to another division instead of selling to an outside customer. In this case therefore, the Trailer division should transfer the trailers at the retail price of $107 that it would have made from selling to outside customers.
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Final answer:
The transfer price should be set at the retail price of $107 per trailer to ensure that the Trailer division does not forego revenue it could have earned from external customers.
Explanation:
When determining the appropriate transfer price between divisions, we should consider the Trailer division's ability to sell to outside customers at the retail price of $107 each. However, since the transfer is internal, we often look at the marginal cost which includes the variable cost but not the fixed cost, since the fixed cost is incurred whether or not the transfer happens.
Given that the Trailer division's variable manufacturing cost is $44 per trailer and they have the capacity to sell all manufactured trailers at the retail price of $107 to outside customers, it would be reasonable to set the transfer price at the retail price of $107. This ensures that the Trailer division does not lose potential revenue from external sales by selling internally to the Assembly division.
