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CMA Intermediate · Management Accounting · Transfer Pricing

Division S sells a component to Division T at a transfer price of Rs 100 per unit; S's variable cost is Rs 60. T converts it and sells the final product externally at Rs 180 with additional variable cost Rs 50. The market price of the component is Rs 95. Under the group's goal of maximising overall profit when S has spare capacity, what is the group's contribution per unit when T sells one unit made from S's component?

The group contribution is Rs 70 per unit, being the Rs 180 external price less S's variable cost of Rs 60 and T's additional variable cost of Rs 50. The transfer price merely moves profit between divisions and does not affect the group total.

  1. ARs 70Correct
  2. BRs 80
  3. CRs 120
  4. DRs 30

Explanation

Group contribution = final selling price - all variable costs = 180 - 60 - 50 = Rs 70. The transfer price of Rs 100 is only an internal split and does not change group contribution. Rs 30 wrongly deducts the transfer price and the T cost of 50 from 180 (180-100-50).

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