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

Godavari Ltd's Division A makes a component with variable cost Rs 60 per unit, capacity 5,000 units, and external demand of 4,000 units at Rs 100 per unit. Division B wants 2,000 units of the component. What is the minimum average transfer price per unit for the 2,000 units?

The minimum average transfer price is Rs 80 per unit. Only 1,000 units come from spare capacity; the other 1,000 displace external sales, each losing Rs 40 contribution. Total needed is Rs 1,20,000 variable cost plus Rs 40,000 lost contribution, which is Rs 1,60,000 over 2,000 units.

  1. ARs 80Correct
  2. BRs 60
  3. CRs 100
  4. DRs 70

Explanation

Spare capacity is 5,000 - 4,000 = 1,000 units. The other 1,000 transferred units displace external sales, each losing contribution of 100 - 60 = Rs 40, so total lost is Rs 40,000. Minimum total revenue = 2,000 x 60 + 40,000 = Rs 1,60,000, so per unit Rs 80. Rs 60 ignores the displaced external sales.

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