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Performance Management · Performance analysis

Transfer Pricing for ACCA Performance Management

Updated 11 October 2026 · Fact-checked

A transfer price is the price at which one division sells goods or services to another division in the same group. The usual rule: minimum price = marginal cost + opportunity cost to the group. The selling division wants a high price, the buying division wants a low one. The best price keeps goal congruence.

Understand Transfer Pricing

Large groups split into divisions. When one division supplies another, the goods change hands internally. The price charged is the transfer price. It is revenue for the seller and a cost for the buyer, so it changes each division's reported profit, though not the group's total profit.

This matters because managers act on divisional profit. If the transfer price is wrong, a manager may take a decision that is good for the division but bad for the group. That is a lack of goal congruence. A good transfer price also supports fair performance measurement, autonomy and sound decisions.

There are three main approaches. Market-based: use the external market price. This works well if the market is competitive and the product is standard. Cost-based: use full cost, marginal cost or cost-plus. It is simple but can hide inefficiency, and full cost can lead to poor decisions. Negotiated: the divisions agree a price, which suits situations with no clear market price but takes time and depends on bargaining strength.

The key exam idea is the range of acceptable prices. The seller will not accept less than its minimum price. The buyer will not pay more than its maximum price. If the minimum is below the maximum, a transfer benefits the group and a price within the range should be agreed.

Dual pricing lets the seller record one price (say market price) and the buyer another (say marginal cost). Both divisions look good, but the profits do not add up to group profit, so the group needs an adjustment. It can also hide poor performance.

Key rules to remember

Minimum transfer price
Minimum price = marginal cost of the selling division + opportunity cost to the group
Marginal cost means variable cost of the units transferred. Opportunity cost is the contribution lost on outside sales or other use of resources.
Minimum price with spare capacity
Minimum price = marginal cost
With no lost external sales, the opportunity cost is zero.
Minimum price with no spare capacity
Minimum price = marginal cost + contribution lost per unit on external sales
If the product has a standard external market, this equals the market price (when selling costs are the same).
Maximum transfer price
Maximum price = lower of (net marginal revenue of the buying division, external buying price)
Net marginal revenue = final selling price less the buyer's own further costs.
Acceptable range
Minimum price ≤ transfer price ≤ maximum price
If minimum exceeds maximum, the transfer should not take place from the group's view.
Cost-plus transfer price
Transfer price = cost + mark-up
Standard cost is better than actual cost, so inefficiency is not passed on.

How to solve Transfer Pricing questions

Use this method for any calculation or discussion question on transfer pricing.

  1. 1Identify the selling and buying divisions and the units involved.
  2. 2Find the selling division's marginal cost per unit. Use variable cost only unless told otherwise.
  3. 3Check capacity. Does the seller have spare capacity, or would transferring cost it external sales?
  4. 4Calculate the minimum price: marginal cost plus any contribution lost per unit.
  5. 5Calculate the maximum price: the buyer's net marginal revenue or the external price it could pay, whichever is lower.
  6. 6Compare the two. If minimum is below maximum, a transfer helps the group. State the acceptable range.
  7. 7Check for special factors: shortages of resources, external supply, taxes, or the effect on divisional profit.
  8. 8Comment on goal congruence, autonomy and performance measurement, and give a recommendation.

Quickest way: Minimum price in three questions

When to use it: Use this in Section A and Section B objective test questions where you need the minimum price fast.

  1. Write down the variable cost per unit of the seller.
  2. Ask: is there spare capacity? If yes, minimum price = variable cost. Stop.
  3. If not, add the lost contribution per unit on external sales. A quick check: for a standard product with an external market, the answer should equal the market price net of any savings in selling costs.
  4. If the buyer's maximum is asked, take the lower of the external price and net marginal revenue.

Common mistakes in Transfer Pricing

  • Using full cost instead of marginal cost as the minimum price.

    Students treat fixed costs as relevant because they appear in the data.

    Fix: Fixed costs that do not change are not relevant to the group. Use variable cost plus opportunity cost.

  • Ignoring opportunity cost when the seller is at full capacity.

    Students stop after finding marginal cost.

    Fix: Always check capacity first. If external sales are lost, add the lost contribution per unit.

  • Forgetting to deduct the buyer's own further costs when finding the maximum price.

    Students use the final selling price directly.

    Fix: Maximum price comes from net marginal revenue: selling price less the buyer's own variable costs.

  • Counting external selling costs that would be saved on internal sales.

    Students use the market price without adjustment.

    Fix: If selling or packing costs are avoided internally, the minimum price is the market price less those savings.

  • Discussing methods without linking to goal congruence.

    Students list advantages and disadvantages from memory.

    Fix: Tie each point to behaviour: does this price make managers decide in the group's interest?

  • Assuming dual pricing keeps group profit correct automatically.

    Both divisions show healthy profits.

    Fix: Divisional profits sum to more than group profit, so a head-office adjustment is needed.

Worked examples

Example 1

Division A makes a component with variable cost of $12 per unit. It sells the component externally at $20 per unit and has no spare capacity. Division B wants to buy 1,000 units. A saves no selling costs on internal sales. What is the minimum transfer price per unit?

Show the solution
  1. Marginal cost = $12 per unit.
  2. No spare capacity, so each internal unit replaces an external sale.
  3. Lost contribution = $20 − $12 = $8 per unit.
  4. Minimum price = $12 + $8 = $20.

Answer: The minimum transfer price is $20 per unit, equal to the market price.

Example 2

Division X makes a part with variable cost of $30 per unit and has spare capacity. Division Y converts each part into a final product that sells for $75, with further variable costs of $35 per unit. Y can buy the part externally for $48. Find the acceptable range and say whether the transfer should go ahead.

Show the solution
  1. X has spare capacity, so the minimum price = marginal cost = $30.
  2. Y's net marginal revenue = $75 − $35 = $40.
  3. Y's external price is $48.
  4. Maximum price = lower of $40 and $48 = $40.
  5. Range: $30 to $40. Minimum is below maximum.

Answer: The acceptable range is $30 to $40 per unit. The transfer should go ahead, since it adds $10 per unit to group profit ($40 − $30).

Exam tips

  • Always state both the minimum and the maximum price before choosing a price. Marks are given for the range.
  • In objective test questions, check capacity wording first. 'Spare capacity' and 'fully utilised' lead to different answers.
  • In written answers, link each method to goal congruence, autonomy and performance measurement. Do not just list features.
  • Show the opportunity cost as a separate line in your working so you can earn method marks.
  • For discussion parts, mention that tax and currency differences in multinational groups can influence the transfer price chosen.

Practice questions from Performance analysis

Transfer Pricing in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Transfer Pricing: frequently asked questions

How do I calculate the minimum transfer price?

Add the seller's marginal cost per unit to the opportunity cost per unit to the group. With spare capacity the opportunity cost is zero. Without spare capacity it is the contribution lost on external sales.

Is market price or cost-plus better for transfer pricing?

Market price is usually better when there is a competitive market for a standard product, because it supports goal congruence and fair divisional profit. Cost-plus is simple but depends on the cost base used and can pass on inefficiency. Where no market exists, cost-plus or negotiation is often used.

What is dual pricing in transfer pricing?

The selling division is credited with one price, such as market price, while the buying division is charged another, such as marginal cost. Both can show good profits and this may encourage internal trade. Divisional profits then exceed group profit, so an adjustment is needed on consolidation.

What happens if the minimum price is higher than the maximum price?

There is no acceptable range. From the group's point of view, the transfer should not take place, because the buyer could obtain the item more cheaply elsewhere or the seller's resources are better used elsewhere.