CMA Intermediate · Management Accounting · Transfer Pricing
Division X makes 5,000 units with variable cost ₹60 per unit and sells them externally at ₹100 per unit. It has no spare capacity. Division Y wants to buy 2,000 units internally; selling externally incurs a variable selling cost of ₹5 per unit that is saved on internal transfers. What is the minimum transfer price per unit for X?
The minimum transfer price is ₹95 per unit. With no spare capacity, each internal unit displaces an external sale, so Division X must recover variable cost ₹60 plus forgone contribution ₹35, which equals the ₹100 market price less the ₹5 selling cost saved.
- A₹60
- B₹95Correct
- C₹100
- D₹35
Explanation
With full capacity, minimum price = variable cost + opportunity cost. Contribution forgone on an external sale = 100 - 60 - 5 = ₹35. Minimum price = 60 + 35 = ₹95, which equals the external price net of the saved selling cost. ₹100 ignores the saving.
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