When the selling unit is operating at full capacity, it would have to not produce something that could have been sold to an outside customer at the market price. The selling division will therefore have an additional opportunity cost if it produces the product for the internal division. This would not justify selling the product internally at a price that is below the market-based transfer price.
If the selling unit had excess capacity, that would justify selling the product internally at a price that is below the market-based transfer price. But the fact that the buying unit has excess capacity is not relevant.
This is a good reason to negotiate the transfer price so that it will be acceptable to both managers. But this by itself does not justify the Plastics Division selling a product internally to another profit center at a price that is below the market-based transfer price, or at any particular transfer price, for that matter.
If selling the product internally enables the selling division to avoid paying sales commissions and collection costs that it would have to pay to sell outside, then it is justified to deduct an amount up to the amount of the saved routine sales and collection costs from the market price to establish the transfer price. The selling division will not be hurt by doing that, and the buying division can benefit from a lower price. The company as a whole will benefit from the saved sales commissions and collection costs.
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