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CMA Intermediate · Management Accounting · Transfer Pricing

Sharma Components Ltd's Division A makes a part with variable cost of ₹120 per unit and full cost of ₹160 per unit. Division A has spare capacity, and the part is transferred to Division B. Using the minimum transfer price rule (variable cost plus opportunity cost), what is the minimum transfer price per unit?

The minimum transfer price is ₹120 per unit. When the supplying division has idle capacity, no outside sales are lost, so opportunity cost is zero and only the variable cost of ₹120 needs to be recovered. Fixed costs are unaffected by the transfer.

  1. A₹160
  2. B₹120Correct
  3. C₹40
  4. D₹280

Explanation

With spare capacity, the opportunity cost of transferring internally is nil, so the minimum price equals variable cost, ₹120. Using full cost of ₹160 wrongly includes fixed costs that do not change with the transfer. ₹40 is just the fixed cost per unit.

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