The minimum transfer price is set by - if no external demand: marginal cost
if external demand: marginal cost + lost contribution
Maximum transfer price: lower of net marginal revenue or external purchase price
For maximum transfer price, I have no confusion.
However, in minimum transfer price, we only account for variable costs. If there was no external demand, surely fixed costs (additional fixed costs, only due to that specific product) will result in loss to selling division?
If there was external demand, marginal cost + lost contribution will only result in break even for selling division.
So how does autonomous selling division benefit from selling internally when they can sell externally at total cost + profit?