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 $99 each. Each trailer incurs $32 of variable manufacturing costs. The Trailer division has capacity for 23,000 trailers per year and incurs fixed costs of $590,000 per year.
1. Assume the Assembly division of Baxter Bicycles wants to buy 4,100 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?
2. Assume the Trailer division currently only sells 10,400 trailers to outside customers, and the Assembly division wants to buy 4,100 trailers per year from the Trailer division. What is the range of acceptable prices that could be used on transfers between Baxter Bicycles' divisions?
Transfer Pricing Method:
The full-cost method or variable-cost method could be used for transfer pricing methods. The method which results in the least cash outflow to the company for tax expense is selected to save tax (or cash outflow). The excess unused capacity available with a company is an important factor in transfer price determination.
Answer and Explanation: 1
1. The transfer price should be $99.
Explanation: The transfer price should be the market price (retail price) as the outside demand of the product...
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fromChapter 10 / Lesson 6
Negotiated transfer pricing is where company representatives negotiate prices themselves, not basing purely on market prices. Learn several advantages and disadvantages to using negotiated transfer pricing demonstrated through two companies' negotiations.