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CMA Intermediate · Management Accounting · Transfer Pricing

Under dual pricing, Division S (seller) is credited at market price of Rs 150 per unit while Division B (buyer) is charged at variable cost of Rs 100 per unit. For 500 units transferred, what is the difference between the combined divisional profits and the company's actual profit effect from this transfer pricing, i.e. the amount adjusted at head office?

The adjustment is Rs 25,000. Dual pricing credits the seller Rs 150 but charges the buyer only Rs 100, creating a Rs 50 per unit gap. Over 500 units, divisional profits total Rs 25,000 more than the company's real profit, so head office eliminates it.

  1. ARs 50,000
  2. BRs 25,000Correct
  3. CRs 75,000
  4. DRs 1,00,000

Explanation

Difference per unit = 150 - 100 = Rs 50. For 500 units, the divisional profits are overstated by 50 x 500 = Rs 25,000. This is eliminated by a head office adjustment on consolidation. Rs 50,000 uses 1,000 units, a wrong quantity.

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