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calculate the appropriate transfer price per pound 649449

TRANSFER PRICING AND SECTION 482

Perrex, Inc., has a division in Honduras that makes a powder used to coat wire, and another division in the United States that manufactures wire. The Powder Division incurs manufacturing costs of $0.83 for one pound of powder.

The Wire Division currently buys its powder coating from an outside supplier for $0.95 per pound. If the Wire Division purchases the powder from the Honduran division, the shipping costs will be $0.05 per pound, but sales commissions of $0.06 per pound will be avoided with an internal transfer.

Required:

1. Which Section 482 method should be used to calculate the allowable transfer price? Calculate the appropriate transfer price per pound.

2. Assume that the Wire Division cannot buy this type of powder externally since it has an unusual formula that prevents electrical conductance. Which Section 48 method should be used to calculate the allowable transfer price? Calculate the appropriate transfer price per pound.

 

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