The minimum transfer price of services

The minimum agreeable transfer price in a transfer of goods between autonomous divisions of a decentralised firm is given by what has become known as the "general rule". According to this rule, the least price acceptable to the transferor division is the sum of the transferor's incremental or outlay costs and any associated "foregone contribution" (opportunity cost). The same rule can be shown to apply to transfers of services as well as goods, provided that the transferor's "foregone contribution" is interpreted in relation to the replacement cost of the services (professional time) transferred. Specifically, "foregone contribution" is defined as the minimum of the contribution margin available to the transferor from the services transferred and the replacement or "outsource" cost of those services. This measure of foregone contribution is analogous to Bonbright's notion of "deprival value" and implies a "more general" general rule, upon which the minimum transfer price of services may be determined not by what those services offer in the way of contribution, but by their (lower) replacement or outsource cost.