CMA Final · Strategic Cost Management · Transfer Pricing (Cost Management)
Kaveri Industries' Division A produces 10,000 units with no spare capacity. Variable cost is Rs 90 per unit, and it sells externally at Rs 150 with Rs 10 per unit of selling cost saved on internal sales. Division B wants units internally. What is the minimum transfer price for A under the general rule (variable cost plus opportunity cost)?
The minimum transfer price is Rs 140. Under full capacity, the division must recover its Rs 90 variable cost plus the Rs 50 contribution forgone on the external sale, which is Rs 150 less Rs 90 less Rs 10 of selling cost avoided on internal sales.
- ARs 150
- BRs 90
- CRs 140Correct
- DRs 60
Explanation
Minimum price = outlay cost + opportunity cost. Outlay is Rs 90. Opportunity cost is the contribution lost on external sale: (150 - 10 saved selling cost... ) contribution externally = 150 - 90 - 10 selling = Rs 50. Minimum = 90 + 50 = Rs 140. Rs 150 ignores the selling cost saved.
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