CMA Intermediate · Management Accounting · Transfer Pricing
Division A of Bharat Components Ltd. transfers 5,000 units of a part to Division B. Variable cost is ₹60 per unit, and fixed cost is ₹20 per unit at normal volume. A has spare capacity. Using the minimum transfer price rule (variable cost plus opportunity cost), what is the minimum transfer price per unit?
The minimum transfer price is ₹60 per unit. Because Division A has spare capacity, it gives up no outside sales, so opportunity cost is nil and only variable cost is relevant. Fixed cost is incurred regardless of the transfer and is not included.
- A₹20
- B₹60Correct
- C₹80
- D₹40
Explanation
With spare capacity, the selling division loses no outside contribution, so opportunity cost is zero. Minimum price = variable cost ₹60 + 0 = ₹60. Including fixed cost (₹80) wrongly treats a sunk cost as relevant.
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