The Eastern Trading Company of Singapore ships prepackaged spices to Hong Kong, the United Kingdom, and the United States, where they are resold by sales affiliates. Eastern Trading is concerned with what might happen in Hong Kong now that control has been turned over to China. Eastern Trading has decided that it should reexamine its transfer pricing policy with its Hong Kong affiliate as a means of repositioning funds from Hong Kong to Singapore. The following table shows the present transfer pricing scheme, based on a carton of assorted, prepackaged spices, which is the typical shipment to the Hong Kong sales affiliate. What do you recommend that Eastern Trading shoulddo?

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Eastern Trading Company Current Transfer Pricing Policy with Hong Kong Sales Affiliate Singapore Parent Consolidated Company Hong Kong Sales revenue Cost of goods sold Gross profit Operating expenses Taxable income Income taxes (20%) 1 7.5%) Net income Affiliate SS500 300 200 50 150 S$500 200 300 100 200 36 164 S$300 100 50 40 124