Skip to content

CMA Intermediate · Management Accounting · Transfer Pricing

Division P produces a part with variable cost Rs 80 per unit. It sells all output externally at Rs 130 per unit and is operating at full capacity. Division Q wants to buy 1,000 units internally, with no saving in selling cost on internal sales. What is the minimum transfer price per unit from P's viewpoint?

The minimum transfer price is Rs 130 per unit. Because the division is at full capacity, each internal unit displaces an external sale, so it must recover variable cost of Rs 80 plus the forgone contribution of Rs 50, which equals the market price.

  1. ARs 80
  2. BRs 50
  3. CRs 130Correct
  4. DRs 210

Explanation

At full capacity, each internal unit displaces an external sale. Opportunity cost = contribution forgone = 130 - 80 = Rs 50. Minimum price = 80 + 50 = Rs 130, equal to the market price. Rs 80 ignores the lost contribution.

Did you get it right without looking?

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

Practise Transfer PricingFree diagnostic mock

More Transfer Pricing questions