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CMA Intermediate · Management Accounting · Transfer Pricing

Division S transfers 5,000 units to Division T at a cost-plus price. Division S's full cost is Rs 90 per unit, and the company requires a return of 20% on capital employed of Rs 3,00,000 attributable to this transfer. What is the transfer price per unit under the return-on-capital method (full cost plus required return)?

The transfer price is Rs 102 per unit. The required return is 20% of Rs 3,00,000, which is Rs 60,000; spread over 5,000 units this is Rs 12 per unit, added to the full cost of Rs 90. Adding 20% of cost instead would wrongly give Rs 108.

  1. ARs 102Correct
  2. BRs 108
  3. CRs 110
  4. DRs 120

Explanation

Required return = 20% x 3,00,000 = Rs 60,000. Per unit = 60,000 / 5,000 = Rs 12. Transfer price = 90 + 12 = Rs 102. Rs 108 wrongly adds 20% of the full cost.

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