The Trailer department of Sprint Bicycles makes bike trailers that attach to bicycles and can carry children or cargo. The trailers have a retail price of $100 each. Each trailer incurs $40 of variable manufacturing costs. The Trailer department has capacity for 20,000 trailers per year, and incurs fixed costs of $500,000 per year.
Required
1. Assume the Assembly division of Sprint Bicycles wants to buy 5,000 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 Sprint Bicycle’s divisions? Explain.
2. Assume the Trailer division currently only sells 10,000 trailers to outside customers, and the Assembly division wants to buy 5,000 trailers per year from the Trailer division. What is the range of acceptable prices that could be used on transfers between Sprint Bicycle’s divisions? Explain.
3. Assume transfer prices of either $40 per trailer or $70 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 Sprint Bicycles.