Reference no: EM131707135

Question: Smith-Jones Company, a U.S.-based corporation, owns 100 percent of Joal SA, located in Guadalajara, Mexico. Joal manufactures premium leather handbags at a cost of 500 Mexican pesos each. Joal sells its handbags to SmithJones, which sells them under Joal's brand name in its retail stores in the United States. Joal also sells handbags to an uncontrolled wholesaler in the United States. Joal invoices all sales to U.S. customers in U.S. dollars. Because the customer is not allowed to use Joal's brand name, it affixes its own label to the handbags and sells them to retailers at a markup on cost of 30 percent. Other U.S. retailers import premium leather handbags from uncontrolled suppliers in Italy, making payment in euros, and sell them to generate gross profit margins equal to 25 percent of selling price. Imported Italian leather handbags are of similar quality to those produced by Joal. Bolsa SA also produces handbags in Mexico and sells them directly to Mexican retailers earning a gross profit equal to 60 percent of production cost. However, Bolsa's handbags are of lesser quality than Joal's due to the use of a less complex manufacturing process, and the two companies' handbags do not compete directly.

Required: a. Given the facts presented, discuss the various factors that affect the reliability of

(1) the comparable uncontrolled price method,

(2) the resale price method, and

(3) the cost-plus method.

b. Select the method from those listed in (a) that you believe is best, and describe any adjustment that might be necessary to develop a more reliable transfer price.