## Exercise 22-20B Determining transfer prices LO C2 The trailer division of Baxter Bicycles makes bike trailers that attach to bicycles and ca

Question

Exercise 22-20B 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 \$92 each. Each trailer incurs \$49 of variable manufacturing costs. The trailer division has capacity for 27,000 trailers per year and incurs fixed costs of \$550,000 per year. Required:
1. Assume the assembly division of Baxter Bicycles wants to buy 5,800 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?
2. Assume the trailer division currently only sells 10,400 trailers to outside customers, and the assembly division wants to buy 5,800 trailers per year from the trailer division. What is the range of acceptable prices that could be used on transfers between Baxter Bicycles’s divisions?

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1 week 2021-09-14T23:01:37+00:00 2 Answers 0

Step-by-step explanation:

1 The transfer price per trailer should be \$92 each

Since the trailer division can sell all the trailer to outside customer, the price which the trailer division will charge will be \$92

Contribution = (Selling price – variable cost) = (92 – 49) = \$43

Transfer price will be = Variable cost + contribution lost to outside customer

Transfer price will be = 49 + 43 = 92

2 Range of acceptable price would be  \$49 but not more than \$92

Since the trailer division will not have to sacrifice any sale to the outside customer, there will not be contribution lost to outside customer

Additional cost which trailer division will have to incure will be \$49 ie variable cost

So the trailer division can charge minimum \$49 for its variable cost

Trailer division can charge maximum \$92 which is the selling price to outside customer.

so the price range will be between \$49 to \$92