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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 $200 each. Each trailer incurs $80 of variable manufacturing costs. The trailer division has a capacity for 40,000 trailers per year and incurs fixed costs of $1,000,000 per year.

1. Assume the assembly division of Baxter Bicycles wants to buy 15,000 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? Explain.

2. What is the range of acceptable prices that could be used on transfers between Baxter Bicycles's divisions? Explain.

3. Assume transfer prices of either $80 per trailer or $140 per trailer are being considered. Comment on the preferred transfer prices from the perspectives of the trailer division manager, the assembly division manager, and the top management of Baxter Bicycles.

Answer :

1. The transfer price should be set at the variable manufacturing cost per trailer to maintain profitability for both divisions, 2. The range of acceptable prices is between $80 and $200 per trailer, and 3. the preferred transfer price may vary depending on the perspective of the division managers and the overall goals of Baxter Bicycles.

1. When the assembly division wants to buy 15,000 trailers per year from the trailer division, the price used on transfers between Baxter Bicycles' divisions should be the variable manufacturing cost per trailer. This is because the trailer division has the capacity to sell all of its trailers to outside customers at the retail price of $200 each. Using the variable manufacturing cost ensures that the assembly division is not overpaying for the trailers and maintains the profitability of the trailer division.

2. The range of acceptable prices that could be used on transfers between Baxter Bicycles' divisions is between $80 and $200 per trailer. This range is based on the variable manufacturing cost per trailer and the retail price. If the price used for transfers is below $80, the trailer division would incur losses. If the price used for transfers is above $200, the assembly division would be overpaying for the trailers and reduce its profitability.

3. From the perspective of the trailer division manager, a transfer price of $80 per trailer would be preferred as it covers the variable manufacturing cost and ensures profitability. From the perspective of the assembly division manager, a transfer price lower than the retail price of $200 would be preferred to maintain profitability. However, the top management of Baxter Bicycles should consider the overall profitability and performance of both divisions to determine the most suitable transfer price.

In conclusion, the transfer price should be set at the variable manufacturing cost per trailer to maintain profitability for both divisions. The range of acceptable prices is between $80 and $200 per trailer, and the preferred transfer price may vary depending on the perspective of the division managers and the overall goals of Baxter Bicycles.

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Rewritten by : Barada

The price that should be used on transfers between Baxter Bicycles' divisions should be the variable manufacturing cost of $80 per trailer. This is because the trailer division has the capacity to sell all of the trailers it manufactures to outside customers. By using the variable manufacturing cost as the transfer price, the assembly division can purchase the trailers at the same cost as outside customers, ensuring fairness and avoiding any potential conflicts.


The variable manufacturing cost of $80 per trailer includes the costs directly associated with producing each trailer, such as materials and direct labor. This cost does not include any fixed costs, such as the trailer division's fixed costs of $1,000,000 per year. By using the variable manufacturing cost as the transfer price, the assembly division can accurately reflect the true cost of the trailers. This ensures that the trailer division is compensated for its expenses and that the assembly division is aware of the actual costs involved in producing the trailers.

The range of acceptable prices for transfers between Baxter Bicycles' divisions would be between $80 and the retail price of $200 per trailer. This is because the transfer price should be within the range of the variable manufacturing cost and the external market price.

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