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

Vihaan Components' Division A makes a part with variable cost Rs 40 per unit and sells it externally at Rs 70. Division B can buy the part internally. Division A has idle capacity. What is the minimum transfer price Division A should accept?

The minimum transfer price is Rs 40, the variable cost per unit. Because Division A has spare capacity, an internal sale sacrifices no external contribution, so it only needs to recover its incremental cost. Rs 70 would apply only if capacity were fully utilised.

  1. ARs 70
  2. BRs 40Correct
  3. CRs 30
  4. DRs 55

Explanation

With idle capacity, the selling division loses no outside contribution by transferring. The minimum price equals variable (marginal) cost of Rs 40. Rs 70 is the minimum only when capacity is fully used, because the Rs 30 external contribution would be lost.

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