Trailer Corp. manufactures one style of light-duty trailer and has two divisions: Assembly and Finishing. The Assembly Division assembles trailers for the Finishing Division where the final coating is applied. Assembly transfers trailers immediately to Finishing. The finished trailers are then sold externally for $600. An intermediate market exists for assembled trailers that are unfinished and sell for $400 per unfinished trailer.

a. Using a transfer price based on total manufacturing costs prepare Operating Income Statements for each division: Assembly and Finishing.

b. Using a transfer price based on external market prices prepare Operating Income Statements for each division: Assembly and Finishing.

c. From a Trailer Corp. perspective, which transfer price method from above is preferred? Explain why this method is best.

\begin{tabular}{|l|c|c|} \hline & Assembly & Finishing \\ \hline Units & 10,000 & 10,000 \\ \hline Variable Costs & $2,500,000 & $1,200,000 \\ \hline Fixed Costs & $1,000,000 & $500,000 \\ \hline \end{tabular}