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CMA Intermediate · Management Accounting · Transfer Pricing

Division X (variable cost ₹70, spare capacity) can supply Division Y, which can buy the same part externally at ₹95. Y needs 2,000 units. Considering only the company as a whole, what is the gain from transferring internally instead of buying externally?

The company gains ₹50,000. Internal supply costs only the variable ₹70 per unit because X has spare capacity, while buying outside costs ₹95. The saving of ₹25 per unit on 2,000 units gives ₹50,000, regardless of the transfer price chosen.

  1. A₹50,000Correct
  2. B₹1,40,000
  3. C₹1,90,000
  4. D₹30,000

Explanation

Company cost internally = ₹70 per unit (variable cost only, spare capacity). External cost = ₹95. Saving = 25 × 2,000 = ₹50,000. ₹1,40,000 is just the internal cost total, and ₹1,90,000 is the external total.

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