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CMA Intermediate · Management Accounting · Transfer Pricing

Division A of Bharat Components Ltd makes a part with variable cost of Rs 40 per unit and sells it externally at Rs 70 per unit. Division B needs the part. Division A has spare capacity and can supply B without losing any external sales. What is the minimum transfer price per unit from A's viewpoint?

The minimum transfer price is Rs 40 per unit. When the supplying division has idle capacity, it forgoes no external contribution, so only its variable cost must be recovered. The external price of Rs 70 matters only when capacity is fully used.

  1. ARs 30
  2. BRs 40Correct
  3. CRs 55
  4. DRs 70

Explanation

Minimum transfer price = variable (marginal) cost + opportunity cost. With spare capacity no external sales are lost, so opportunity cost is zero. Minimum = Rs 40. Rs 70 would apply only if A were at full capacity and lost an external sale.

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