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Answer :
When the Trailer division can sell all of its trailers to outside customers, the transfer price should be set at the market price of $90 per trailer
1. The transfer price between divisions should be based on the market price of the trailers. Since the Trailer division can sell all of its trailers to outside customers and has no excess capacity, it is reasonable to use the market price of $90 per trailer as the transfer price. This ensures that the Assembly division pays the same price as outside customers, promoting fairness and efficiency within the company.
2. When the Trailer division has excess capacity and the Assembly division wants to buy 5,700 trailers, the range of acceptable prices on transfers between divisions is based on the variable manufacturing costs. The minimum acceptable transfer price would be the variable manufacturing cost per trailer, which is $41. This ensures that the Trailer division covers its costs and avoids losses.
On the other hand, the maximum acceptable transfer price would be the market price of $90 per trailer. This prevents the Trailer division from gaining excessive profits at the expense of the Assembly division. By setting the transfer price within this range, the company can ensure a fair and efficient internal transfer of trailers while maximizing overall profitability.
In summary, when the Trailer division can sell all of its trailers to outside customers, the transfer price should be set at the market price of $90 per trailer. When the Trailer division has excess capacity and the Assembly division wants to buy trailers, the acceptable range for the transfer price is between the variable manufacturing cost of $41 per trailer and the market price of $90 per trailer.
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