CMA Intermediate · Management Accounting · Transfer Pricing
Division X has capacity of 10,000 units, variable cost Rs 60 per unit, and external demand of 7,000 units at Rs 100. Division Y requests 5,000 units internally. Y can buy externally at Rs 90 per unit. Any shortfall in X's external sales is lost. What is the minimum transfer price per unit for X?
The minimum transfer price is Rs 76 per unit. X uses 3,000 units of idle capacity and displaces 2,000 external units, losing Rs 40 contribution each (Rs 80,000). Variable cost of Rs 3,00,000 plus Rs 80,000 gives Rs 3,80,000 over 5,000 units.
- ARs 76Correct
- BRs 60
- CRs 100
- DRs 90
Explanation
X has 3,000 units spare capacity; the other 2,000 units transferred displace external sales. Lost contribution = 2,000 x (100-60) = Rs 80,000. Minimum total = 5,000 x 60 + 80,000 = Rs 3,80,000, i.e. Rs 76 per unit. Rs 100 wrongly treats all units as displacing sales.
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