Reference no: EM132996716

Question - Livingston Transfer Price - Livingston U.S. has a wholly owned subsidiary (Optipels, LLC) in Israel that manufactures fiber optic scalpels used in highly specialized surgeries. The production costs amount to $350.00 per unit. Livingston is expecting to import approximately 40,000 units this year and sell them to hospitals and surgical centers in the U.S. at a price of $975.00 per unit. The following information applies:

Optipels, LLC pays for shipping to the U.S. at $10.00 per unit. Import duties are levied on the invoice (transfer) price. The Israeli Shekel (ILS) is relatively stable and as such the subsidiary is expected to repatriate only 25% of its income as dividends to Livingston U.S.

Optipels, LLC has excess capacity and supplies other wholesalers with their product, selling them at an average price of $450.00. The scalpels delivered to these other wholesalers require slightly different packaging, branding, and marketing and as a result, the company estimates the value-added is $15.00 per scalpel. Production costs are not affected by these changes.

In addition to the costs directly related to the product, Optipels, LLC incurs other operating costs of $18.00 per scalpel and Livingston incurs other operating costs of $50.00 per unit.

There are several competitors to Livingston in the market. After researching Standard & Poor's Industry Surveys, Livingston estimates that these competitors generate an average gross profit of 40%.

Required -

a. Determine the possible transfer prices under the (1) Comparable Uncontrolled Price method and (2) Resale Price (Comparable Gross Profit) method.

b. Assume that either method above is acceptable to both the US and Israeli taxing authorities. Determine which transfer price would maximize Livingston's worldwide after-tax cash flow from the sale of the scalpels.