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

Kaveri Auto's Division P makes a component at variable cost Rs 120 per unit and can sell all output externally at Rs 180, with no spare capacity. Division Q needs 1,000 units. Transfer will save P selling costs of Rs 10 per unit on internal sales. What is the minimum transfer price per unit for P?

The minimum transfer price is Rs 170. With no spare capacity, Division P must recover the external selling price, but internal sales avoid Rs 10 per unit of selling cost, so the net opportunity is Rs 180 minus Rs 10. Rs 180 overlooks this saving.

  1. ARs 120
  2. BRs 180
  3. CRs 170Correct
  4. DRs 190

Explanation

Minimum price = variable cost + opportunity cost. Opportunity cost = external contribution forgone = 180 - 120 - 10 saved? Compute directly: external net revenue is Rs 180, less Rs 10 selling cost avoided on internal sales gives Rs 170. Check: 120 + (180-10-120)=170 hence Rs 170. Rs 180 ignores the saved selling cost.

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