Two-part tariff (transfer pricing)
A two-part tariff in transfer pricing charges the buying division a variable cost per unit transferred plus a fixed periodic fee for reserved capacity, enabling optimal short-run output decisions while allowing the selling division to.
FrameworkTransfer pricing
See it move
A buying division pays a variable charge of €15 per unit for 1,000 units transferred, €15,000, plus a fixed periodic fee of €5,000 reserving capacity, totalling €20,000. The variable rate preserves efficient output decisions; the fixed fee lets the selling division recover fixed costs it could not recoup at marginal cost alone.
The formula
Variables
- total amount charged by the selling division to the buying division for the period (€)
- variable cost per unit transferred — the per-unit element of the tariff, set equal to the selling division's marginal cost (€ per unit)
- units transferred from the selling division to the buying division during the period (units)
- fixed periodic fee charged for the capacity reserved by the buying division, regardless of actual volume transferred (€)
The variable element v ensures the buying division's marginal cost equals the selling division's variable cost, preserving efficient short-run output decisions. The fixed fee F allows the selling division to recover its fixed capacity costs without distorting the per-unit pricing signal.