Exercise 9-20B Determining transfer prices LO C2 The trailer division of Baxter

Question

Exercise 9-20B Determining transfer prices LO C2 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 $108 each. Each trailer incurs $45 of variable manufacturing costs. The trailer division has capacity for 23,000 trañers per year and incurs fixed costs of $520,000 per year Required 1. Assume the assembly division of Baxter Bicycles wants to buy 5.300 trailers per yeer from the trailer division fthe traler dwss can sell all of the trailers it manufactures to outside customers, what price should be divisions? 2. Assume the trailer division currently only sells 9,400 trailers to outside customers. and the assembly division wants to buy 5,300 trailers per year from the trailer division. What is the range of acceptable prices that gould be used on transfers between Bextr Bicycles's divisions? used on transfers b etween Baxter Bicycless 1. Transfer price per trailer 2 Transfer price per trailer wil be at least but not more than

Explanation / Answer

Req 1. When the Selling division does not have excess capacity of making the products for another division. In such a case, the transfer price shall be fixed at sum total of variable cost for making the product foro purchasing division and loss of contribution to selling divison. Therfore, In this casae, the Trailer division does not have exces capaicty: Transfer price: variable cost of Mannufacture per trailer 45 Add: Loss of Contribution oer trailer: Sale price 108 Less: Vraiable cost to outside customer 45 63 Transfer price: 108 Req 2: Now, when the Trailer division have an excess capacity of produce then in such case, The selling divison shall charge minimum of variable cost of making the product for other division. In this case, the minimum limie of Transfer price is $ 45( i.e. variable cost of making) For, the purchasing divison, the maximum price at which it is acceptable to it is any price below the price at which it is available to division. In this case, the maximum price acceptable is $108 (assumed that it will also get the materiala at the same rate at which it is sold in the market) Therfore, Transfer price per trailer shall be atleast $ 45 per trailer but not more than $108 per trailer.

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