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CMA Intermediate · Management Accounting · Transfer Pricing

Division P of Kaveri Ltd makes a part with variable cost Rs 150 per unit. It sells to outside customers at Rs 210 per unit and is operating at full capacity. Division Q wants to buy the part internally. Transfer price is set by the minimum price rule (variable cost plus opportunity cost). Selling the part externally saves Rs 10 per unit of selling cost that is not incurred on internal transfers. What is the minimum transfer price per unit?

The minimum transfer price is Rs 200. With no spare capacity, Division P must recover its variable cost of Rs 150 plus the Rs 50 contribution it forgoes from external sale. That equals the market price of Rs 210 less the Rs 10 selling cost saved on internal sales.

  1. ARs 150
  2. BRs 200Correct
  3. CRs 210
  4. DRs 160

Explanation

At full capacity, opportunity cost is the lost contribution from external sales. External contribution = 210 - 150 - 10 = Rs 50. Minimum transfer price = 150 + 50 = Rs 200, which equals market price less the saved selling cost (210 - 10). Rs 210 ignores the saved cost.

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