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

Godavari Ltd's Division P makes 8,000 units of an intermediate at variable cost Rs 120 and fixed cost Rs 30 per unit. Its capacity is 8,000 units, and 5,000 units are sold externally at Rs 220. Division Q needs 3,000 units, otherwise buying externally at Rs 200. The group should transfer internally if P's relevant cost per unit is below Rs 200. Which transfer price range is acceptable to both divisions, and what is the group gain per unit from internal transfer?

The acceptable range is Rs 120 to Rs 200 and the group gains Rs 80 per unit. P has 3,000 units idle, so its floor is variable cost of Rs 120, ignoring fixed cost, while Q will pay at most the Rs 200 external price.

  1. ARs 150 to Rs 200; gain Rs 50
  2. BRs 120 to Rs 200; gain Rs 80Correct
  3. CRs 120 to Rs 220; gain Rs 100
  4. DRs 120 to Rs 200; gain Rs 30

Explanation

P has 3,000 units of spare capacity (8,000 - 5,000), so internal supply loses no external sale. P's minimum is variable cost Rs 120; fixed cost is irrelevant. Q's maximum is the external price Rs 200. Group gain = 200 - 120 = Rs 80 per unit. Including fixed cost (Rs 150) would wrongly give Rs 50.

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