Market-based transfer price
Market-based transfer price sets the internal charge between divisions equal to the prevailing external market price.
Also known asmarket-based transfer pricing
FrameworkTransfer pricing
See it move
The infographic is a two-column comparison showing an external sale and an internal divisional transfer side by side. In both cases the price is €90: externally that is the competitive market rate charged to an outside customer; internally Division B pays the same €90 to the selling division. Because the price is identical in both columns, the selling division is indifferent between the two buyers, and the buying division pays no premium over what the open market would charge.
The formula
Variables
- Internal transfer price charged by the selling division (€ per unit)
- Prevailing price for the same good or service in the external market (€ per unit)
Appropriate when a competitive external market exists; both divisions are treated as independent traders.
Check yourself
Division Alpern sells a sub-assembly to external customers at €75 per unit and operates at full capacity. Variable cost is €40 per unit. The group board instructs Alpern to use a market-based transfer price when supplying the same component to Division Blentham. What transfer price should Alpern charge?