CMA Intermediate · Management Accounting · Transfer Pricing
Division X has spare capacity and produces a component with variable cost Rs 40 per unit and fixed cost Rs 15 per unit. Division Y can buy a similar component from outside at Rs 55 per unit. Under a negotiated transfer price, what range of prices per unit would be acceptable to both divisions for an internal transfer?
The acceptable range is Rs 40 to Rs 55 per unit. Division X, having spare capacity, needs only to cover its variable cost of Rs 40, while Division Y will not pay more than the external price of Rs 55. Fixed cost is irrelevant to this decision.
- ARs 40 to Rs 55Correct
- BRs 55 to Rs 70
- CRs 15 to Rs 55
- DRs 40 to Rs 95
Explanation
The seller with spare capacity needs at least variable cost, Rs 40. The buyer will pay at most the outside price, Rs 55. Any price from Rs 40 to Rs 55 benefits the company; fixed cost is irrelevant as it is incurred regardless.
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