The Pricing Strategy for Transfers Between Divisions in Baxter Bicycles
Introduction
The Trailer division of Baxter Bicycles makes bike trailers that attach to bicycles and can carry children or cargo. The trailers have a market price of $94 each. Each trailer incurs $38 of variable manufacturing costs. The Trailer division has capacity for 21,000 trailers per year and has fixed costs of $520,000 per year.
1. Scenario 1: No Excess Capacity
Assume the Assembly division of Baxter Bicycles wants to buy 5,400 trailers per year from the Trailer division. If the Trailer division can sell all of the trailers it manufactures to outside customers (and has no excess capacity), what price should be used on transfers between divisions?
2. Scenario 2: Excess Capacity
Assume the Trailer division currently only sells 9,600 trailers to outside customers and has excess capacity. The Assembly division wants to buy 5,400 trailers per year from the Trailer division. What is the range of acceptable prices on transfers between divisions?
1. What is the transfer price per trailer in each scenario? 2. What is the range of acceptable prices for transfers between divisions in Scenario 2?The range of acceptable prices on transfers between divisions is $38 to $56 per trailer. The transfer price per trailer should be at least $38 but not more than $56 to ensure that the Trailer division does not incur a loss and the Assembly division does not pay more than the external market price.
If the Trailer division can sell all of the trailers it manufactures to outside customers and has no excess capacity, the price on transfers between divisions should be based on the market price of $94 per trailer. This ensures that the Assembly division is charged the same price as external customers and promotes fairness within the company.
In this scenario, the Trailer division has excess capacity and the Assembly division wants to buy 5,400 trailers per year. The range of acceptable prices on transfers between divisions can be determined based on the variable manufacturing costs and the opportunity cost.
The variable manufacturing costs per trailer are $38. This represents the additional cost incurred by the Trailer division to produce one additional trailer.
The opportunity cost is the potential revenue the Trailer division could earn by selling the trailers to external customers instead of transferring them to the Assembly division. Currently, the Trailer division sells 9,600 trailers to external customers, leaving a capacity of 21,000 - 9,600 = 11,400 trailers per year.
To calculate the range of acceptable prices:
Lower Bound: Variable Manufacturing Cost per Trailer
Transfer Price per Trailer (Lower Bound) = $38
Upper Bound: Opportunity Cost per Trailer
Opportunity Cost per Trailer = (Market Price - Variable Manufacturing Cost per Trailer)
Opportunity Cost per Trailer = ($94 - $38) = $56
Therefore, the range of acceptable prices on transfers between divisions is $38 to $56 per trailer. The transfer price per trailer should be at least $38 but not more than $56 to ensure that the Trailer division does not incur a loss and the Assembly division does not pay more than the external market price.