Answer to Question #91677 in Economics for lydia momanyi

Question

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)

Answer 1

The appropriate transfer pricing method is the transactional net margin method. The transfer price is: 0.2*300,000,000 + 10,000,000 = 70,000,000.