When there is extra demand from UFL beyond the agreed supply of 240,000 tons per annum, there is a diversion of supply of ammonium nitrate from…
CA Final · Integrated Business Solutions (Multidisciplinary Case Study) · MTP · September 2025
When there is extra demand from UFL beyond the agreed supply of 240,000 tons per annum, there is a diversion of supply of ammonium nitrate from external sales to transfer to UFL. This results in loss of contribution to BCPL. Using your suggestion in (b) above, DETERMINE whether the internal transfer price of 155,000 per ton of ammonium nitrate supplied as suggested by Roshan Lal will appropriately compensate this loss of contribution.
Suggested Answer and Working Notes:
When ammonium nitrate is diverted from external sales to captive consumption, BCPL will have to be compensated for the lost contribution. Roshan Lal is trying to convince Ramesh Shah of BCPL to accept an internal transfer price of 155,000 per ton of ammonium nitrate supplied. However, the suggested price range as per answer (b) above is 160,000 per ton to 170,000 per ton of ammonium nitrate supplied. The minimum transfer price that BCPL should charge to recover any lost contribution would be - 160,000 per ton. Therefore, BCPL will incur loss of contribution if Ramesh Shah accepts Roshan Lal's offer of 155,000 per ton as the internal transfer price.
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