Rideaway Corp. is a high-end bicycle manufacturing company that produces mountain bikes. Soft Saddle is a division of Rideaway that manufactures bicycle seats. SoftSaddle’s seats are used in Rideaway’s bikes and are sold to other bike manufacturers. Cost information per seat follows:

In addition, its capacity data follow:

Required:

1. Assuming Rideaway produces 3,000 bikes per year, determine the overall benefit of using seats from SoftSaddle instead of purchasing them externally.

2. Determine the maximum price that the bike production facility would be willing to pay to purchase the seats from SoftSaddle. How is the overall benefit divided between the two divisions if this transfer price is used?

3. Determine the minimum that SoftSaddle will accept as a transfer price. How is the overall benefit divided between the two divisions if this transfer price is used?

4. Determine the mutually beneficial transfer price for the bicycle seats.

5. How would your answer change if SoftSaddle were currently operating at capacity?

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Variable cost Full cost $22.00 27.00 Market price 40.00