Exercise 10.14

Transfer Pricing and Section 482

Sugarland, Inc., has a division in Indonesia that makes dyestuff in a variety of colors used to dye denim for jeans, and another division in the United States that manufactures denim clothing. The Dyestuff Division incurs manufacturing costs of $2.68 for one pound of powdered dye.

The Clothing Division currently buys its dye powder from an outside supplier for $3.80 per pound. If the Clothing Division purchases the powder from the Indonesian division, the shipping costs will be $0.34 per pound, but sales commissions of $0.05 per pound will be avoided with an internal transfer.

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

1a. Calculate the appropriate transfer price per pound. Round your answer to the nearest cent.

2. Assume that the Clothing Division cannot buy this type of powder externally since it has an unusual formula that results in a color particular to Sugarlands jeans. Which Section 482 method should be used to calculate the allowable transfer price?

2a. Calculate the appropriate transfer price per pound. Round your answer to the nearest cent.