Assume the assembly division of Baxter Bicycles wants to buy 5,800 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's divisions

Answer: $104

Explanation:

The Trailer division has the capacity to sell ALL of its inventory to outside customers for a price of $104.

They will therefore transfer the trailers to the Assembly line at the same price of $104 that they charge outside customers because anything less would be a loss on profit that could have been made from selling the trailers outside.

This loss on profit would affect the entire Baxter Bicycles and not just the Trailer Division so it is better to sell and transfer at the same price.