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Answer :
The range of acceptable prices on transfers between divisions is $38 to $56 per trailer. The transfer price per trailer should be at least $38 but not more than $56 to ensure that the Trailer division does not incur a loss and the Assembly division does not pay more than the external market price.
If the Trailer division can sell all of the trailers it manufactures to outside customers and has no excess capacity, the price on transfers between divisions should be based on the market price of $94 per trailer. This ensures that the Assembly division is charged the same price as external customers and promotes fairness within the company.
In this scenario, the Trailer division has excess capacity and the Assembly division wants to buy 5,400 trailers per year. The range of acceptable prices on transfers between divisions can be determined based on the variable manufacturing costs and the opportunity cost.
The variable manufacturing costs per trailer are $38. This represents the additional cost incurred by the Trailer division to produce one additional trailer.
The opportunity cost is the potential revenue the Trailer division could earn by selling the trailers to external customers instead of transferring them to the Assembly division. Currently, the Trailer division sells 9,600 trailers to external customers, leaving a capacity of 21,000 - 9,600 = 11,400 trailers per year.
To calculate the range of acceptable prices:
Lower Bound: Variable Manufacturing Cost per Trailer
Transfer Price per Trailer (Lower Bound) = $38
Upper Bound: Opportunity Cost per Trailer
Opportunity Cost per Trailer = (Market Price - Variable Manufacturing Cost per Trailer)
Opportunity Cost per Trailer = ($94 - $38) = $56
Therefore, the range of acceptable prices on transfers between divisions is $38 to $56 per trailer. The transfer price per trailer should be at least $38 but not more than $56 to ensure that the Trailer division does not incur a loss and the Assembly division does not pay more than the external market price.
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