Skip to content

CMA Final · Strategic Cost Management · Transfer Pricing (Cost Management)

Division P of Kaveri Auto Ltd. produces a part with variable cost Rs 90 per unit. It can sell all it makes externally at Rs 150, with selling cost of Rs 10 per unit saved on internal transfers. P is at full capacity. What is the minimum transfer price per unit for an internal transfer?

The minimum transfer price is Rs 140. At full capacity, it equals the external price of Rs 150 less the Rs 10 selling cost avoided on internal sales, i.e. variable cost Rs 90 plus lost contribution Rs 50. Rs 150 wrongly ignores the saving.

  1. ARs 150
  2. BRs 140Correct
  3. CRs 90
  4. DRs 100

Explanation

At full capacity, minimum price = variable cost + opportunity cost. Opportunity cost is the lost contribution: external price 150 less variable cost 90 less saved selling cost 10 gives 50 in contribution, but effectively the minimum equals the net external price: 90 + (150-90-10) = Rs 140. Rs 150 ignores the saved selling cost.

Did you get it right without looking?

One question tells you little. A timed set on Transfer Pricing (Cost Management) shows your real accuracy, how long you take and where you lose marks.

Practise Transfer Pricing (Cost Management)Free diagnostic mock

More Transfer Pricing (Cost Management) questions