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CMA Intermediate · Management Accounting · Transfer Pricing

Division A of Sarthak Industries makes a component with a variable cost of Rs 40 per unit and has spare capacity. Division B can buy it internally or externally at Rs 70 per unit. Using the general rule that the minimum transfer price is the variable cost plus opportunity cost, what is the minimum transfer price per unit for A?

The minimum transfer price is Rs 40 per unit. When the supplying division has spare capacity, it loses no outside sales by transferring internally, so the opportunity cost is zero and the floor equals the variable cost of Rs 40.

  1. ARs 40Correct
  2. BRs 70
  3. CRs 30
  4. DRs 110

Explanation

With spare capacity, A gives up no outside contribution, so opportunity cost is nil. Minimum price = 40 + 0 = Rs 40. Rs 70 would apply only if A were at full capacity and could sell outside at Rs 70.

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