Company Sub is a subsidiary of Company Parent. Company Sub provides datacenter support services to
Company Parent. The functions of Company Sub include racking and stacking the servers, maintaining
correct temperature for the servers, providing security for the building and other such functions of
routine nature. All the know how to run the servers, engagement with customers who use the
datacenters, technology aspect of the servers is run by Company Parent. If any technology breaks with
the servers, it is fixed remotely by engineers of Company Parent. The servers are owned by Company
Sub and the building is rented by Company Sub.

Requirements

Company Parent uses this datacenter to provide cloud services to its customers. Therefore, Company
Parent must pay Company Sub for the services it provides. The costs incurred by Company Sub are the
following:
• Salaries and wages - $500,000
• Bonus - $150,000
• Training cost- $8000
• Rent - $400,000
• Depreciation (servers) - $600,000
• DC infrastructure (Cables) - $10,000
• Utilities - $500,000
• Interest Expense - $1000
• Unrealized foreign exchange loss - $800
As a transfer pricing expert, could you advise what should be the appropriate transfer price that
Company Sub should charge Company Parent for providing the DC services? This will involve answering
the following questions –
• What costs should be included in the cost base of the Company Sub to be charged to Company
Parent? Will all the above costs be included? If not, provide a reason for the excluded costs?
• Should Company Sub charge out the costs at cost or should it be charging a markup on the
costs? If your answer is “yes” to markup, please give a reason and explain how will you figure
out what that markup % should be? (If you want to refer to what unrelated parties are charging
for these type of services, a benchmarking query is attached.)
Write a memo (1-page minimum) to Company Parent supporting your decision for the transfer price
that Company Sub should charge. Please show your calculations in an excel file.

,

Cost Type Amount
Operating Expenses
Total Operating Cost $0
Markup% %
Markup Amt
Cost + Markup
Non-operating expenses

Answer rating: 100% (QA)

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