1. Superior Brakes Corporation manufactures truck brakes at its plant in Mansfield, Ohio, at a cost of $10 per unit. Superior sells its brakes directly to U.S. truck makers at a price of $15 per unit. It also sells its brakes to a wholly owned sales subsidiary in Brazil that, in turn, sells the brakes to Brazilian truck makers at a price of $16 per unit. Transportation cost from Ohio to Brazil is $0.20 per unit. Superior's sole competitor in Brazil is Bomfreio SA, which manufactures truck brakes at a cost of $12 per unit and sells them directly to truck makers at a price of $16 per unit. There are no substantive differences between the brakes manufactured by Superior and Bomfreio.
Required:
Given the information provided, discuss the issues related to using
(a) the comparable uncontrolled price method,
(b) the resale price method, and
(c) the cost-plus method to determine an acceptable transfer price for the sale of truck brakes from Superior Brakes Corporation to its Brazilian subsidiary.
2. Lahdekorpi OY, a Finnish corporation, owns 100 percent of Three-O Company, a subsidiary incorporated in the United States.
Required:
Given the limited information provided, determine the best transfer pricing method and the appropriate transfer price in each of the following situations:
a. Lahdekorpi manufactures tablecloths at a cost of $20 each and sells them to unrelated distributors in Canada for $30 each. Lahdekorpi sells the same tablecloths to Three-O Company, which then sells them to retail customers in the United States.
b. Three-O Company manufactures men's flannel shirts at a cost of $10 each and sells them to Lahdekorpi, which sells the shirts in Finland at a retail price of $30 each. Lahdekorpi adds no significant value to the shirts. Finnish retailers of men's clothing normally earn a gross profit of 40 percent on sales price.
c. Lahdekorpi manufacturers wooden puzzles at a cost of $2 each and sells them to Three-O Company for distribution in the United States. Other Finnish puzzle manufacturers sell their product to unrelated customers and normally earn a gross profit equal to 50 percent of the production cost.
Please complete solutions for these two problems in memo format.