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

Tapti Steel's Rolling Division transfers to the Fabrication Division at full cost plus 20% markup. Full cost is Rs 250 per unit (variable Rs 180). Fabrication sells finished goods at Rs 400, incurring Rs 90 own additional variable cost per unit. What is Fabrication's contribution per unit at this transfer price, and is internal transfer beneficial to the company if Rolling has spare capacity?

Fabrication earns Rs 10 per unit after paying Rs 300 transfer price and Rs 90 own cost. From the company's view, contribution is Rs 130 per unit using Rs 180 variable cost, so transfer is beneficial with spare capacity.

  1. ARs 10; yes, company gains Rs 130 per unitCorrect
  2. BRs 10; no, as Fabrication earns little
  3. CRs 130; yes, company gains Rs 130 per unit
  4. DRs 40; yes, company gains Rs 130 per unit

Explanation

Transfer price = 250 x 1.2 = Rs 300. Fabrication contribution = 400-300-90 = Rs 10. Company contribution = 400-180-90 = Rs 130 per unit, positive with spare capacity, so internal transfer benefits the company even though Fabrication's gain is small.

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