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

Divisions A and B of Sagar Industries Ltd. are profit centres. Division A makes a component with variable cost of Rs 140 per unit and sells it externally at Rs 200. Division A has spare capacity, and B wants to buy 5,000 units. Using the general minimum transfer price rule, what is the minimum transfer price A should accept per unit?

The minimum transfer price is Rs 140 per unit. Because Division A has idle capacity, it forgoes no external contribution, so the opportunity cost is zero and the floor equals the variable cost of Rs 140. Rs 200 applies only under full capacity.

  1. ARs 140Correct
  2. BRs 200
  3. CRs 60
  4. DRs 170

Explanation

With spare capacity, A gives up no external sales, so no opportunity cost arises. Minimum price = variable cost + opportunity cost = 140 + 0 = Rs 140. Rs 200 would apply only if A were at full capacity and losing external sales.

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