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Hoover Ltd sells its vacuums to its overseas related distributor, Dustbuster Ltd and a local unrelated distributor Suck Ltd. Information available about the transactions of Dustbuster Ltd and Suck Ltd are as summarised below;


Dustbuster Suck Ltd
Price paid 15,000 13,500
Delivery terms CIF FOB
Quantity 95 100
Freight cost - 1,500
Insurance - 500
Credit period 60 days Upon dispatch
Interest rate on working capital 10% -
i) Which transfer pricing method is most appropriate (2 marks)
ii) Calculate the Arm’s Length price. (8 marks)
Vogue Co. provides administrative support Services (Invoicing and Book-Keeping). Mode Co. an Associated Enterprise requested Vogue Co. to provide it with invoicing services. Mode Co. thinks it needs about 1 hours of invoicing services. Total Cost of 1 hours of invoicing services is USD 120 as per Vogue Co. data. Independent Fad Co. provides comparable services. The P&L of B Co is as follows:-
Sales – KES 600,000; Labour Cost - KES 255,000; Other Expenses – KES 150,000; SGA Expenses – KES 95,000.

i) Which transfer pricing method is most appropriate (2 marks)

ii) What Transfer Price should Vogue Co. charge Mode Co. for 1 Hours of Invoicing Services? (14 marks)
VW is an overseas car manufacturer and distributor. It is the parent company of a Kenyan Company, VW.Ke. VW.Ke is a Kenyan distributor of Toureg cars. Dobie Ltd, a Kenyan company unrelated to VW has also been appointed by VW to distribute Tiguan cars in Kenya. The Kenyan market for both car models is similar. Besides distribution VW.Ke performs advertising, marketing and promotional activities. Dobie Ltd realises a gross margin of 20% from the sale of Tiguan cars to consumers.

VW.Ke’s sales to independent parties for the year was Shs 300,000,000. The marketing activities cost to VW.Ke was Shs 10,000,000.

i) Given the available information, determine the appropriate transfer pricing method and compute the transfer price. Show your workings. (8 marks)
Targaryen Ltd and Greyjoy Ltd are associated parties. Greyjoy Ltd is engaged in the manufacture of electrical goods of varied range. One of such goods is heating element which it sells to Targaryen Ltd which is engaged in the manufacture of electrical heaters where it uses the heating element purchased from Greyjoy Ltd as a raw material. Greyjoy Ltd is not selling the heating element to any of its other customers. Few comparable companies are available which are engaged in manufacturing similar products (heating elements) realizing an average mark-up of 10%.
The cost of manufacturing one heating element is Shs 5,000.

i) Which transfer pricing method is most appropriate (2 marks)
ii) Calculate the transfer price. (4 marks)
What are the three economic questions every nation must answer?
Gloria wants to open her own restaurant. She has already purchased a building and raised enough cash to purchase the furniture, tools, and equipment required. She has also hired waitstaff and some cooks. However, she is unable to find a person who will be able to come up with interesting recipes every day. What type of factor of production is Gloria lacking?
You are employed as an economic consultant to the regional planning office of a large metropolitan area. A recession has caused the hospitals in the city to consider raising prices. You know that the price elasticity of demand for hospital services equals -0.25, and the income elasticity of demand equals +0.45. Given this information, tell how the quantity demanded for services will change if:

what will be the average real income decreases by 10 percent?
You are thinking about buying an insurance product with the following specifications: the offered insurance product requires you to make payments semi-annually of $50 and do so for the next 20 years (first payment six months from today.). if your required rate of return is 6% per year (i.e. effective), what amount of money should the insurance product offer to pay you at the end of 20 years.
Which choices will help you cut back expenses so that you can spend more money on promotions or advertising?
A local garage uses two types of inputs, capital and labour, to service used cars. Their production function is described by Q = 8K^0.8L^0.2, where Q is the number of cars serviced, K is the amount of capital, equipment and tools used in the process and L denotes the input of human labour. The costs of inputs are £16 per unit of labour and £1 per unit of capital. The garage has received an order from a taxi company to service a fleet of 48 cars. Consider a constrained cost minimisation problem and answer the following questions.

a. What is the cost minimising quantity of capital the garage should use?
K* =
b. What is the cost minimising quantity of labour the garage should use?
L* =
c. What is the lowest cost at which 48 cars can be serviced?
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