CMA Intermediate · Management Accounting · Transfer Pricing
Division P produces a component with variable cost ₹90 per unit and sells all its output externally at ₹150 per unit with no capacity left. It is asked to supply Division Q internally. External sale incurs selling cost of ₹10 per unit which is saved on internal transfers. What is the minimum transfer price acceptable to P?
The minimum transfer price is ₹140 per unit. With no spare capacity, P must recover variable cost of ₹90 plus the ₹50 contribution lost on external sales after excluding the ₹10 selling cost saved internally, which equals the market price less saved cost.
- A₹150
- B₹90
- C₹140Correct
- D₹100
Explanation
At full capacity, the minimum price = variable cost + opportunity cost (lost contribution). Lost contribution = 150 − 90 − 10 = ₹50. Minimum price = 90 + 50 = ₹140, equal to the market price net of the saved selling cost. Quoting ₹150 ignores the saved selling cost.
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