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

Division Y of Mahesh Industries finishes a semi-finished product and sells the final product at ₹500 per unit. Y's own further processing cost is ₹220 per unit. Y can buy the same semi-finished product from an outside supplier at ₹260 per unit. What is the maximum transfer price Y should be willing to pay to the supplying division of its own company?

The maximum transfer price is ₹260. A buying division will pay no more than the lower of its net marginal revenue (500 minus 220, which is ₹280) and the external purchase price (₹260). Above ₹260 it would buy from the outside supplier instead.

  1. A₹260Correct
  2. B₹280
  3. C₹220
  4. D₹500

Explanation

The buying division's ceiling is the lower of the outside purchase price and its net marginal revenue. Net marginal revenue is 500 - 220 = ₹280, and the outside price is ₹260. The lower figure, ₹260, is the maximum, since Y would rather buy outside above that. Choosing ₹280 ignores the cheaper outside source.

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