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 $102 each. Each trailer incurs $44 of variable manufacturing costs. The Trailer division has capacity for 26,000 trailers per year and incurs fixed costs of $570,000 per year.

The question is centred on transfer price  at which the trailer division sells trailers to the bicycle division as contained in the attached

The transfer price is $102,when there is opportunity to sell externally without surplus capacity

However, in the second instance, transfer price would be between $44 and $102

Explanation:

The first question on transfer price requires a transfer that the trailer division should sell to the bicycle division provided all of the its output could be sold externally,that shows the reasonable price in that instance is the variable of the trailer's division plus the contribution lost per unit from not being able to sell to external parties

This is calculated as:

Variable cost                        $44

lost contribution($102-$44) $58

Transfer price                       $102

In the second instance the transfer price would be between the lowest possible transfer price and  $102 computed above.

From,the question, there is extra capacity that can be used  to fulfill the order of the bicycle, the lowest possible transfer  price is variable cost to the trailer division

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