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CMA Intermediate · Management Accounting · Transfer Pricing

Division M makes an intermediate product with variable cost ₹50 per unit and capacity of 8,000 units. External demand is 6,000 units at ₹90 per unit. Division N, which needs 4,000 units, can buy from outside at ₹85 per unit. Division N's final product sells for ₹200 with other variable cost ₹100 per unit. What is the minimum transfer price per unit that M should accept for all 4,000 units, and is internal transfer beneficial to the company?

The minimum price is ₹70 per unit. Only 2,000 of the 4,000 units use spare capacity; the other 2,000 forgo ₹40 contribution each (₹80,000). Total relevant cost is ₹2,80,000 against ₹3,40,000 externally, so internal transfer saves the company ₹60,000.

  1. A₹70; beneficial, saving ₹60,000 over buying outsideCorrect
  2. B₹50; beneficial, saving ₹1,40,000 over buying outside
  3. C₹70; not beneficial since it exceeds ₹50
  4. D₹90; beneficial since it equals M's external price

Explanation

M has 2,000 spare units; the other 2,000 displace external sales at contribution 90-50 = ₹40. Total opportunity cost = 2,000 x 40 = ₹80,000. Minimum total = 4,000 x 50 + 80,000 = ₹2,80,000, i.e. ₹70 per unit. Buying outside costs 4,000 x 85 = ₹3,40,000, so the company saves ₹60,000. Option 2 ignores opportunity cost.

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