Peyvandi Co., a profit center of California Enterprises, manufactures Product BP3751-9S to sell internally to other company divisions as well as externally. One unit of Product BP3751-9S sells for $72. Production and selling costs for a unit of Product BP3751-9S follow.
Direct material ................... $ 9.00
Direct labor ..................... 11.40
Variable overhead .................. 4.80
Fixed overhead (based on production of 1,400,000 sets) ..... 16.50
Variable selling expense ................. 3.00
Andersen Co., another division of California Enterprises, wants to purchase 50,000 units of Product BP3751-9S from Peyvandi Co. during the next year. No selling costs are incurred on internal sales.
a. All the units of Product BP3751-9S that can be produced by Peyvandi Enterprises can be sold externally. What should the minimum transfer price be? Explain.
b. Assume that Peyvandi Co. is experiencing a slight slowdown in external demand and will be able to sell only 1,200,000 units of Product BP3751-9S externally next year at the $72 selling price. What should be the minimum selling price to Andersen Co. under these conditions? Explain.
c. Assume that Joe Dhir, the manager of Andersen Co., offers to pay Peyvandi Co.'s production cost plus 25 percent for each unit of Product BP3751-9S. Dhir receives an invoice for $2,606,250 but was planning on only $1,575,000. How were these amounts determined? What created the confusion? Explain.