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CMA Intermediate · Management Accounting · Transfer Pricing

Division X of Kaveri Industries is at full capacity. It makes a unit at variable cost Rs 120 and sells all output externally at Rs 200, saving Rs 10 per unit of selling cost on internal transfers. Division Y wants units internally. What is the minimum transfer price per unit for X?

The minimum transfer price is Rs 190. With no spare capacity, the division loses external sales, so the price equals the market price of Rs 200 less the Rs 10 selling cost saved on internal sales. Charging Rs 200 ignores that saving.

  1. ARs 120
  2. BRs 190Correct
  3. CRs 200
  4. DRs 80

Explanation

At full capacity every internal unit displaces an external sale. Opportunity cost = external contribution = 200 - 120 = Rs 80 (the Rs 10 saving is already inside the adjustment below). Using the standard approach: minimum price = variable cost 120 + lost contribution 80 - selling cost saved 10 = Rs 190, equal to external price less savings (200 - 10). Rs 200 ignores the saving.

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