Negotiated transfer price
Negotiated transfer price is an internal pricing approach in which the selling and buying divisions agree a charge through direct bargaining.
Also known asnegotiated transfer pricing
FrameworkTransfer pricing
See it move
The infographic is a price-axis timeline with three marked points defining the negotiating range. The seller's floor is €30 — the variable cost below which the selling division would make a loss on the transfer — and the buyer's ceiling is €55, the external market price above which the buying division would simply purchase from outside. The negotiated transfer price of €42 sits between these bounds, representing the agreed price at which both divisions are willing to transact and share the gains from internal trade.
The formula
Variables
- Variable cost per unit incurred by the selling division (€)
- Opportunity cost per unit — contribution margin foregone by not selling externally (€)
The seller will not accept any transfer price below this floor; doing so would reduce divisional profit.
Variables
- Price the buying division would pay to an outside supplier (€)
The buyer will not pay more internally than the external market price. The negotiated transfer price lands between floor and ceiling.
Check yourself
Division S produces a component at a variable cost of €22 per unit and sells its entire output to external customers at €35. The group asks Division S to supply some units to Division B, which can purchase the same component externally for €33. Is a mutually beneficial negotiated transfer price possible?