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CMA Final · Strategic Cost Management · Transfer Pricing (Cost Management)

A company allows divisions to negotiate transfer prices. Division M has variable cost Rs 70 per unit and Division N can buy from outside at Rs 110. M has spare capacity. Which transfer price range will produce goal congruence and be acceptable to both divisions?

Any transfer price between Rs 70 and Rs 110 works. Division M, with spare capacity, will not accept less than its variable cost of Rs 70, and Division N will not pay more than the Rs 110 external price, so both gain within that range.

  1. ABelow Rs 70
  2. BBetween Rs 70 and Rs 110Correct
  3. CAbove Rs 110
  4. DExactly Rs 110 only

Explanation

M accepts any price at or above its variable cost of Rs 70 given spare capacity; N accepts any price at or below the Rs 110 external price. So the bargaining range is Rs 70 to Rs 110.

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