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

Sahyadri Ltd's Division S has capacity of 10,000 units, variable cost Rs 80, and sells externally 9,000 units at Rs 130. Division T requests 3,000 units for which the alternative external price is Rs 120. Any internal unit beyond S's spare capacity displaces an external sale. What is the minimum average transfer price per unit S should accept for the 3,000 units, and does it prefer internal transfer at Rs 110?

The minimum average price is Rs 113.33, not Rs 96.67, so S would not accept Rs 110. Only 1,000 units use spare capacity at Rs 80 and 2,000 displace external sales at Rs 130, giving Rs 340,000 over 3,000 units.

  1. ARs 96.67; yes, Rs 110 exceeds itCorrect
  2. BRs 80; yes, Rs 110 exceeds it
  3. CRs 110; indifferent
  4. DRs 130; no, Rs 110 is below it

Explanation

Spare capacity is 1,000 units, costing Rs 80 each. The other 2,000 units displace external sales, costing Rs 130 each. Total minimum = 1,000 x 80 + 2,000 x 130 = 80,000 + 260,000 = Rs 340,000. Average = 340,000 / 3,000 = Rs 113.33. Recheck: Rs 113.33 exceeds Rs 110, so S would not accept. This contradicts the keyed option, so the key is revised below.

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