CMA Intermediate · Management Accounting · Transfer Pricing
Division X makes a product with full cost of Rs 200 per unit, of which variable cost is Rs 140. Head office fixes the transfer price at full cost plus 25% mark-up on full cost. Division Y buys 2,000 units. What is X's total profit on this transfer?
X's profit is Rs 1,00,000. The mark-up of 25% on full cost of Rs 200 is Rs 50 per unit, giving a transfer price of Rs 250. Multiplying the Rs 50 profit by 2,000 units gives Rs 1,00,000.
- ARs 1,00,000Correct
- BRs 70,000
- CRs 80,000
- DRs 1,50,000
Explanation
Mark-up = 25% of 200 = Rs 50 per unit, so the price is Rs 250. Profit over full cost = 50 x 2,000 = Rs 1,00,000. Rs 70,000... would not follow from the data; using variable cost as the base gives 25% of 140 = 35 per unit, i.e. Rs 70,000, which is the wrong base.
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