Minimum transfer price
Minimum transfer price is the lowest price a selling division will accept for goods transferred internally: its variable cost per unit plus any contribution margin given up on external sales it must displace.
See it move
Division Alfa makes a component at €22 variable cost per unit and is running at full capacity, selling everything externally at €35. Diverting one unit internally gives up €13 of contribution, so the minimum transfer price is €22 plus €13, or €35 — exactly the external price at full capacity.
The formula
Variables
- Minimum transfer price (€ per unit)
- Variable cost per unit in the selling division (€ per unit)
- Opportunity cost per unit — contribution margin foregone on displaced external sales; zero if the selling division has spare capacity (€ per unit)
The selling division's floor price: what it costs to make the unit, plus the contribution it gives up on any external sale the transfer displaces.
Check yourself
Division Silva is operating at full capacity, selling every unit it makes externally at €48 per unit. Its variable cost per unit is €30. A sister division wants to buy units internally. What is the minimum transfer price Silva should accept?