Question

Fresno OY, a Norwegian corporation, wholly owns Ceretony Inc., a subsidiary located and operating in Canada. Given the limited information provided, please (a) determine the appropriate transfer pricing method and (b) calculate the transfer price in the following three scenarios.

1. Fresno OY manufactures window units at a cost of $150 each and sells them to an unrelated distributor in the United States for $450 each. Fresno sells the same exact window units to Ceretony Inc., who then sells them to customers in Canada.

2. Ceretony Inc. manufactures t-shirts at a cost of $15 each and sells them to Fresno, who then sells the t-shirts to Norwegian customers at a retail price of $30. Fresno adds no significant changes/value to the shirts before sale. Norwegian clothing retailers normally earn a gross profit of 40 percent on sales price.

3. Fresno OY manufactures yo-yos at a cost of $20 each and sells them to Ceretony for distribution in Canada (sales price $25). Other Norwegian yo-yo manufacturers sell their products to unrelated customers and normally earn a gross profit equal to 20 percent of the production cost.

Answer 1

ANSWER :

Case 1:

Given that,fresno Oy sells window units to unrelated distributor in the united states and sell same units to ceretony inc..it means comparable uncontrolled price is available

a)Therefore the tranfer pricing method used in the case is 'comparable uncontrolled services price method'

b)The comparable uncontrolled price at which Fresno sold to unrelated parties is $450.

Therefore tranfer price is $45

Case 2:

Given that,caetony sells T shirt to Fresno who then sell T shirts to Nowegian customers at retail price.in this case,fresno is again reselling to customers.

a)Therefore the tranfer pricing method used in this case is'Resale pricing method'

b)Transfer pricing under resale pricing method =Resale price to customers-Gross profit made on that sale

=$30-$30*40%=$18

Therefore tranfer price is $18

Case 3:

given that fresno manufactires the product and other manufactures in the industry makes 20% gross profit on production cost.Here both production cost and profit ratio is available.

a)Therefore the tranfer pricing method used in this is 'cost plus pricing method'

b)Tranfer price under cost plus pricing method=Manufacture cost to fresno+gross profit

=$20+$20*20%=$24

Therefore transfer price is $24