Maximum transfer price
Maximum transfer price is the highest price a buying division will pay for an internal transfer, capped by the external market price for the item or by what the buyer can still profitably charge for its finished product.
See it move
Division Beta's finished piece sells for €150, and further processing costs €70, capping what it can pay for the component at €80. An outside supplier would sell the same component for €65. Since €65 is lower than the €80 cap, the maximum transfer price is €65 — the tighter of the two constraints.
The formula
Variables
- Maximum transfer price (€ per unit)
- Price of buying the same input from an outside supplier (€ per unit)
- Selling price of the buying division's finished product (€ per unit)
- Buying division's further processing costs, excluding the transferred item's own price (€ per unit)
The buying division's ceiling price: it will never pay more than the cheaper of buying externally or what its own profitability on the finished product allows.
Check yourself
Division Orbit buys a component to finish into a product that sells for €200. Its further processing costs, excluding the component itself, are €120 per unit. An outside supplier would sell Orbit the same component for €95. What is the maximum transfer price Orbit should agree to pay internally?