CMA Intermediate · Management Accounting · Transfer Pricing
Division P makes a part at a variable cost of Rs 55 per unit. It operates at full capacity and sells all output externally at Rs 90 per unit, saving Rs 5 per unit in selling costs on internal transfers. Division Q wants the part internally. What is the minimum transfer price per unit for P?
The minimum transfer price is Rs 85 per unit. P is at full capacity, so it must recover the external selling price of Rs 90, reduced by the Rs 5 per unit selling cost it avoids on internal sales.
- ARs 85Correct
- BRs 55
- CRs 90
- DRs 95
Explanation
At full capacity, opportunity cost is the lost external contribution. External contribution = 90 - 55 = 35. Internal transfer saves Rs 5 selling cost, so the minimum price = 55 + 35 - 5 = Rs 85 (equivalently 90 - 5). Rs 90 ignores the saving.
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