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Answer :
1. If the trailer division of Baxter Bicycles can sell all of its trailers to outside customers and has no excess capacity, the price for transfers between divisions should be at least $109 per trailer. This is because the market price of the trailers is $109 each, and the trailer division would not want to sell to the assembly division at a lower price and miss out on potential profits from outside customers.
2. If the trailer division currently sells 10,500 trailers to outside customers and has excess capacity, the range of acceptable prices on transfers between divisions would depend on the variable and fixed costs associated with producing the additional 4,200 trailers.
Assuming the variable manufacturing cost per trailer remains the same at $46, the trailer division would incur an additional cost of $193,200 ($46 x 4,200) to produce the additional trailers.
To determine the range of acceptable prices, we can use the following formula:
Price = Variable Costs + Fixed Costs / Units Produced + Desired Profit per Unit
Assuming a desired profit per unit of $10,000, and using the total fixed cost of $570,000 and the additional variable costs of $193,200, the range of acceptable prices would be:
Price = $239,200 / 4,200 + $10,000 = $66.67 to $84.76 per trailer
Therefore, the assembly division should be willing to pay a price between $66.67 and $84.76 per trailer to the trailer division, depending on negotiations and other factors such as competition and market demand.
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Rewritten by : Barada
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 ideally be the market price, which is $109 per trailer.
The minimum transfer price is $46 (variable cost per trailer).
The maximum transfer price is $109 (market price per trailer).
Question 1:
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 ideally be the market price, which is $109 per trailer. This is because the division can sell all its output at the market price, and using the market price for internal transfers helps to ensure that each division is evaluated based on its contribution to the company's overall profitability.
Answer for Question 1: $109 per trailer
Question 2:
When there is excess capacity in the trailer division, and the assembly division wants to buy 4,200 trailers per year, the range of acceptable prices on transfers between divisions can be calculated using the variable cost and the market price.
1. Minimum Transfer Price:
- The minimum transfer price should cover the variable manufacturing costs, as these are the costs directly incurred by the trailer division in producing the additional trailers. Therefore, the minimum transfer price is $46 (variable cost per trailer).
2. Maximum Transfer Price:
- The maximum transfer price can be based on the market price since the trailer division has excess capacity. The company can benefit from utilizing the excess capacity to generate additional revenue at the market price. Therefore, the maximum transfer price is $109 (market price per trailer).
Range of Acceptable Prices: $46 to $109 per trailer
In summary, the transfer price should not be lower than the variable manufacturing cost, and it should not exceed the market price, given the excess capacity in the trailer division.
