Question

Transfer Pricing and Section 482

Mossfort, Inc., has a division in Canada that makes long-lasting exterior wood stain. Mossfort has another U.S. division, the Retail Division, that operates a chain of home improvement stores. The Retail Division would like to buy the unique, long-lasting wood stain from the Canadian division, since this type of stain is not currently available. The Exterior Stain Division incurs manufacturing costs of $13.70 for one gallon of stain.

If the Retail Division purchases the stain from the Canadian division, the shipping costs will be $1.40 per gallon, but sales commissions of $0.70 per gallon will be avoided with an internal transfer. The Retail Division plans to sell the stain for $35.00 per gallon. Normally, the Retail Division earns a gross margin of 40 percent above cost of goods sold.

Required:
1. Calculate the appropriate transfer price per gallon.
$ per unit

Answer 1

In this case resale price method is preferable to use as market price of the product transferred internally is not available
Calculate transfer price using resale price method as shown below
Resale price	Transfer price +(Mark-up*Transfer price)
35	Transfer price +(0.40*Transfer price)
35	1.4 Transfer price
Transfer price	35/1.4
Transfer price	$25
Thus, transfer price of $25 per gallon is appropriate