Transfer-price range
Transfer-price range is the band within which an internal transfer benefits both the selling and buying division. The floor is the seller's variable cost plus any opportunity cost from lost external sales.
Also known asfloor and ceiling
FrameworkTransfer pricing
See it move
A price-axis timeline marks three points: the floor at €25 (the selling division's variable cost), an agreeable zone around €40 where both divisions benefit, and a ceiling at €60 (the buying division's external market price). Any transfer price set within this range gives the selling division a contribution above its variable cost while saving the buying division money compared with the open market. A price set outside the range — below the floor or above the ceiling — would leave one division worse off than trading externally.
The formula
Variables
- Variable cost per unit in the selling division (€ per unit)
- Contribution margin foregone per unit on displaced external sales; zero if capacity is idle (€ per unit)
Minimum the selling division will accept without being made worse off by the internal transfer.
Variables
- Price at which the buying division can source the good or service from an external supplier (€ per unit)
Maximum the buying division will pay before it is cheaper to go outside; any price between floor and ceiling benefits both divisions.