Question

Transfer Pricing and Section 482

Sugarland, Inc., has a division in Indonesia that makes dyestuff in a variety of colors used to dye denim for jeans, and another division in the United States that manufactures denim clothing. The Dyestuff Division incurs manufacturing costs of $2.75 for one pound of powdered dye.

The Clothing Division currently buys its dye powder from an outside supplier for $3.80 per pound. If the Clothing Division purchases the powder from the Indonesian division, the shipping costs will be $0.30 per pound, but sales commissions of $0.05 per pound will be avoided with an internal transfer.

Required:

1. Which Section 482 method should be used to calculate the allowable transfer price?
Comparable uncontrolled price method

Calculate the appropriate transfer price per pound. Round your answer to the nearest cent.
$ per unit

2. Assume that the Clothing Division cannot buy this type of powder externally since it has an unusual formula that results in a color particular to Sugarland’s jeans. Which Section 482 method should be used to calculate the allowable transfer price?
Cost-plus method

Calculate the appropriate transfer price per pound. Round your answer to the nearest cent.
$ per unit

Answer 1

Ans 1

Since Market Price is given in question, therefore Comparable Uncontrolled Price Method is suitable for calculating transfer price.

Transfer Price = Market Price + Shipping Cost - Selling Commission

= $3.80 + $0.30 - $0.05

= $4.05 per pound or 405 cents

Ans 2

As market price does not given in question, therefore Cost Plus method is best suitable for calculating transfer price.

Transfer Price = Manufacturing cost + Shipping Cost

= $2.75 + $0.30

= $3.05 per pound or 305 cents