Lahdekorpi OY, a Finnish corporation, owns 100 percent of Three-O Company, a sub
ID: 2481027 • Letter: L
Question
Lahdekorpi OY, a Finnish corporation, owns 100 percent of Three-O Company, a subsidiary incorporated in the United States. Required: Given the limited information provided, determine the best transfer pricing method and the appropriate transfer price in each of the following situations: a. Lahdekorpi manufactures tablecloths at a cost of $20 each and sells them to unrelated distributors in Canada for $30 each. Lahdekorpi sells the same tablecloths to Three-O Company, which then sells them to retail customers in the United States. b. Three-O Company manufactures men's flannel shirts at a cost of $10 each and sells them to Lahdekorpi, which sells the shirts in Finland at a retail price of $30 each. Lahdekorpi adds no significant value to the shirts. Finnish retailers of men's clothing normally earn a gross profit of 40 percent on sales price. c. Lahdekorpi manufacturers wooden puzzles at a cost of $2 each and sells them to Three-O Company for distribution in the United States. Other Finnish puzzle manufacturers sell their product to unrelated customers and normally earn a gross profit equal to 50 percent of the production cost.Explanation / Answer
a)
The CUP Method is suitable for calculating the transfer price, where the price charged for the for seeling the product is the transfer price
Thus Transfer price=$30
b)
Resale Plus Method is more suitable for this transaction, where the resale price is reduced by gross profit margin and the expense is reduced
Transfer price=30/(1+profit margin)=30/(1+0.4) =$24.42
Since there is no expense, as value added was zero
Thus transfer price=$24.42
c)
Cost Plus Method is more suitable for this transaction, where the Profit margin is added to the cost
Transfer Price=Cost incurred*(1+Profit Margin)
Transfer Price-2*(1+0.5)=$3
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