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CMA Final · Strategic Cost Management · Transfer Pricing (Cost Management)

Division X of Narmada Ltd. makes an intermediate product with variable cost Rs 60 and has 8,000 units spare capacity. Division Y can use it to make a final product with its own further variable cost Rs 50, selling at Rs 140. Y's external market has no alternative source of the intermediate product at below Rs 100. For company profit, what is the total contribution per unit of the final product to the company, and should Y buy internally?

Corrected: the company's contribution is Rs 30 per unit (140 less 60 less 50), and internal transfer is beneficial since X has spare capacity.

  1. ARs 30; yes, because X's price is lower
  2. BRs 80; yes, because company contribution is positiveCorrect
  3. CRs 90; no, because Y's margin is negative
  4. DRs 80; no, because the market price is Rs 100

Explanation

For the company, the relevant cost is the variable cost: 60 + 50 = 110. Contribution = 140 - 110 = Rs 30. Hence the correct figure should be checked: this equals Rs 30, not Rs 80.

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