Discussion:
Global Computer Corporation manufactures its laptops in Asia and sells laptops internationally. The company produces a relevant range during 2014 of 100,000 t0 200,000 units. The variable unit costs for each computer are:
Labor $50
Material $100
Shipping and handling $25
Fixed overhead for the plant is $10 million
Response the following questions:
1. Using variable costing method, what transfer price would the firm charge to its American sister company?
2. Assuming the plant is currently producing 100,000 units this year, what transfer price would it charge to its American sister company using the full costing method? What would the price be if if the firm is producing 150,000 units?
3. The American sister company sells its computers in the market for $500 per unit. It normally pays $400 per unit from an outsourced firm for the identical product. Would the above 2 methods of costing (variable and full costing) be comparable to market based transfer pricing?
4. The tax rate in Asia is 15% and the tax rate in the USA is 38%. There is also a 20% duty on Asian computer imports. Which method of costing would be favored by the parent corporation that owns both companies?
5. The IRS decides to audit the parent company and argues that Global Computer Corporation is avoiding taxes my manipulating its transfer pricing. How would you argue that the pricing is done at "arm's length" if the market based approach is used?