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

Tanishq Auto Parts' transfer pricing policy sets the price at full cost plus a 25% mark-up. Full cost per unit uses a variable cost of ₹90 and fixed overheads of ₹6,00,000 absorbed over the normal capacity of 10,000 units. Actual production this period was 12,000 units. What is the transfer price per unit under the policy?

The transfer price is ₹187.50. Fixed overhead is absorbed at the normal capacity rate of ₹60 per unit, giving a full cost of ₹150 with the ₹90 variable cost. A 25% mark-up on ₹150 gives ₹187.50, regardless of the higher actual output.

  1. A₹187.50Correct
  2. B₹175.00
  3. C₹112.50
  4. D₹150.00

Explanation

Fixed overhead absorbed at normal capacity is 6,00,000 / 10,000 = ₹60 per unit. Full cost = 90 + 60 = ₹150. Adding 25% gives 150 × 1.25 = ₹187.50. ₹175 results from wrongly using actual output for absorption, and ₹112.50 applies the mark-up to variable cost only.

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