Answer to Question #91679 in Economics for lydia momanyi

Question

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)

Answer 1

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

ii) The mark-up is: (15,000 - (1,500 + 500))/2,000×100% = 650%.

The transfer price is: 2,000×(1 + 6.5) = 15,000.