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

Kaveri Engines Ltd's Foundry Division makes a casting with variable cost Rs 300 per unit. It operates at full capacity and sells all output externally at Rs 420 per unit, saving Rs 20 per unit of selling cost on internal transfers. The Assembly Division wants 1,000 castings internally. Using the general minimum transfer price rule (variable cost plus opportunity cost), what is the minimum transfer price per unit?

The minimum transfer price is Rs 400 per unit. At full capacity, each internal unit displaces an external sale at Rs 420, but Rs 20 of selling cost is saved. Variable cost Rs 300 plus lost net contribution Rs 100 gives Rs 400.

  1. ARs 400Correct
  2. BRs 420
  3. CRs 300
  4. DRs 440

Explanation

The opportunity cost is the lost external contribution, which is the external price less the selling cost saved on internal transfers: 420 - 20 = 400. This is the minimum price, equal to variable cost 300 plus lost contribution 100 (420 - 20 - 300). Rs 420 ignores the saved selling cost.

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