CMA Intermediate · Management Accounting · Transfer Pricing
Division A of Sundaram Industries makes a component with variable cost of Rs 60 per unit and fixed cost of Rs 20 per unit at normal capacity. Division A has spare capacity and there is no outside market for the component. The company policy is to transfer at full cost plus 10% mark-up on full cost. What is the transfer price per unit?
The transfer price is Rs 88 per unit. Full cost is variable Rs 60 plus fixed Rs 20, which is Rs 80, and a 10% mark-up on full cost adds Rs 8. Applying the mark-up only to variable cost would wrongly give Rs 66.
- ARs 66
- BRs 80
- CRs 88Correct
- DRs 82
Explanation
Full cost = 60 + 20 = Rs 80. Mark-up 10% of 80 = Rs 8. Transfer price = 80 + 8 = Rs 88. Rs 66 applies the mark-up to variable cost only; Rs 80 omits the mark-up.
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