Calculating Acceptable Transfer Prices Between Baxter Bicycle's Divisions

Introduction

Situation

Question:

Final answer:

The range of acceptable transfer prices for transferring trailers between Baxter Bicycle's divisions is between $39 and $95. This range covers the variable manufacturing cost of $39 per trailer and goes up to the external market price of $95, ensuring the trailer division contributes to fixed costs and generates profit.

Explanation:

When considering the range of acceptable transfer prices for trailers from Baxter Bicycle's trailer division to the assembly division, we need to take into account the variable costs and the potential for contribution to fixed costs. The variable cost of manufacturing each trailer is $39, which is the minimum acceptable transfer price since it covers the additional costs incurred in producing the trailer. Because the trailer division is not operating at full capacity, selling at marginal costs to the assembly division is better than not selling at all, as it would contribute to covering the fixed costs without affecting the division's ability to meet external demand.

However, the price should not exceed the market price of $95, as this is the price at which trailers are sold to outside customers. Hence, the range of acceptable transfer prices would be between $39, the variable cost, and $95, the market price. Within this range, any price that contributes more than the variable cost would help in covering the fixed costs and provide additional profit to the company.