Answer to Question #91678 in Economics for lydia momanyi

Question

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)

Answer 1

i) The appropriate transfer pricing method is the cost plus method.

ii) The mark-up is: (600,000 - (255,000 + 150,000 + 95,000))/500,000×100% = 20%.

The transfer price is: 120×(1 + 0.2) = 144.