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CMA Intermediate · Management Accounting · Transfer Pricing

Division M of Bharat Components makes a product with variable cost Rs 80 per unit. Its capacity is 10,000 units; it sells 8,000 units externally at Rs 130 and can sell no more externally. Division N asks for 4,000 units internally; N's alternative is to buy outside at Rs 120. The minimum transfer price for M for the 4,000-unit order is set at variable cost plus opportunity cost of lost external contribution. Which price per unit is the minimum M should accept?

The minimum price is Rs 105 per unit. Only 2,000 of the 4,000 units use spare capacity; the other 2,000 displace external sales earning Rs 50 contribution each, a Rs 1,00,000 loss. Variable cost of Rs 3,20,000 plus Rs 1,00,000 gives Rs 4,20,000 over 4,000 units.

  1. ARs 80
  2. BRs 105Correct
  3. CRs 130
  4. DRs 120

Explanation

Spare capacity = 10,000 - 8,000 = 2,000 units. Internal order of 4,000 needs 2,000 units diverted from external sales. Lost contribution = 2,000 x (130 - 80) = Rs 1,00,000. Total minimum revenue = 4,000 x 80 + 1,00,000 = Rs 4,20,000, so Rs 105 per unit. Rs 80 ignores the lost sales.

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