I would write him a longgggggggg letter lecturing him on his behaviour. I wouldn't be needlessly insulting.. instead stay calm and mature. I would also lecture / educate him on transgender people and that it is likely nothing what he believes it is.
This is how I handled my father when he said he could never accept me. Actually, I wrote him several very long letters
At first my father ignored the letters (and me, for many months), but eventually he started replying (he said he read each of them many many times) and he started returning to normal. Just this last month or two he started giving me the weekly call again to say hi (which he does with everyone.)
Here is the start to one of my letters (when he finally replied, he said he was worried about offending me and ruining our relationship)... it gives you a sense of how I approached things. I was firm and strong and didn't give him any room for misunderstanding.
"Well, I'm glad you finally replied, don't worry about offending me .. .I knew what your thoughts were going to be for a long time (obviously a religious and sexist older male isn't going to see transgender as a positive, that is kind of textbook). I also prefer we be honest with each other, instead of all this "PC crap" as you say (so, hope you aren't too offended as well, some of my points might be phrased a bit harsh). Just so long as you don't let your views interfere with normal life there won't be a problem (and don't voice them outside of discussions like this, I won't really tolerate that and it will be a quick path to not seeing me much). I'll also be more considerate to not as quickly criticize your views when we are around each other .. .I know me saying things won't change anything and just makes people uncomfortable anyway. "
andd later on in the letter (that I was gay was also a shock to him hahaha)...
"So, I want you to be able to say absolutely anything you want about this now. But, eventually (in a year or two) I will want to move on with my life and start removing conflict from around me. At that point, I'll likely become much less tolerant to any negativity towards what I am doing (and most likely you will be more comfortable with things by then anyway. I also suggest you get used to the idea that I date men, because if I get married I would expect him to be accepted into the family as sue and scott are). Like I said, I am extremely proud of what I am. I see it as extremely beautiful and actually the ideal "gender" a person could wish to be.
I know you probably think I am crazy (and i think the same of you

), but I still love you and it really doesn't need to affect any time we spend together."