Chapter 9, Problem 18E

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 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’ divisions? Explain.

2. Assume the trailer division currently only sells 20,000 trailers to outside customers, and the assembly division wants to buy 15,000 trailers per year from the trailer division. What is the range of acceptable prices that could be used on transfers between Baxter Bicycles’ 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.