Assignment task:
Holman Company, a U.S. based corporation, owns 100 percent of Jones SA, located in Guadalajara, Mexico. Jones manufactures premium leather handbags at a cost of 500 Mexican pesos each. Jones sells its handbags to Holman, which sells them under Jones's brand name in its retail stores in the United States. Jones also sells handbags to an uncontrolled wholesaler in the United States. Jones invoices all sales to U.S. customers in U.S. dollars. Because the customer is not allowed to use Jones's brand name, it affixes its own label to the handbags and sells them to retailers at a markup on cost of 30 percent. Other U.S. retailers import premium leather handbags from uncontrolled suppliers in Italy, making payment in euros, and sell them to generate gross profit margins equal to 25 percent of selling price. Imported Italian leather handbags are of similar quality to those produced by Jones. Bolsa SA also produces handbags in Mexico and sells them directly to Mexican retailers, earnings a gross profit equal to 60 percent of production cost. However, Bolsa's handbags are of lesser quality than Jones's due to the use of a less complex manufacturing process, and the two companies' handbags do not compete directly.
Required:
1. Given the facts presented, discuss the various factors that affect the reliability of (1) the comparable uncontrolled price method, (2) the resale price method, and (3) cost-plus method.
2. Select the method from those listed in (a) that you believe is best, and describe any adjustment that might be necessary to develop a more reliable transfer price.