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

Vindhya Components Ltd has a Machining Division that sells a part to its Assembly Division. The part's variable cost is Rs 140 per unit and the Machining Division has spare capacity. The part can be bought from outside at Rs 190 per unit. What is the minimum transfer price acceptable to the Machining Division?

The minimum transfer price is Rs 140 per unit. When the selling division has idle capacity, it gives up no external sales, so its opportunity cost is zero and only the variable cost of Rs 140 must be recovered. Rs 190 is the buyer's ceiling.

  1. ARs 140Correct
  2. BRs 190
  3. CRs 165
  4. DRs 50

Explanation

With spare capacity the selling division loses no outside contribution, so its minimum price is the variable (marginal) cost of Rs 140. Rs 190 is the maximum the buying division would pay, not the minimum for the seller. Rs 50 is merely the difference between the two.

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