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CMA Intermediate · Management Accounting · Transfer Pricing

Division A of Kaveri Industries makes a component with variable cost of Rs 120 per unit and fixed cost of Rs 30 per unit at normal capacity. Division A has spare capacity and no outside market for the component. Division B wants to buy it internally. Using the minimum transfer price rule (variable cost plus opportunity cost), what is the minimum transfer price per unit?

The minimum transfer price is Rs 120 per unit. With idle capacity and no outside market, the selling division gives up no contribution, so only the variable cost matters. Fixed cost of Rs 30 is incurred anyway and should not be added.

  1. ARs 120Correct
  2. BRs 150
  3. CRs 30
  4. DRs 90

Explanation

With spare capacity and no external market, the opportunity cost of transferring is nil. Minimum price = variable cost 120 + 0 = Rs 120. Rs 150 wrongly includes fixed cost, which is not an incremental cost when capacity is idle.

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