Prepare a reliable transfer price

Reference no: EM1377440

Smith-jones Company a US based corporation, owns 100 percent of Joal SA, located in Guadalajara, Mexico. Joal manufactures premium leather hand bags at a cost of 500 Mexican pesos each. Joal sells its handbags to SMith-Jones, which sells them under Joal's brand name in its retail stores in the United States. Joal all sells handbags to an uncontrolled wholesaler in the United States. Joal invoices all sales to US customers in US dollars. Because the customer is not allowed dto 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%. Other US retailers import premium leather handbags from uncontrolled suppliers in Italy, making payment in euros, and sell them to generate fross 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. Thus, 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 openly.

Required:

a. Provide the facts presented, show the various factors that affect reliability of (1) the comparable uncontrolled price method, (2) the resale price technique, (3) the cost plus technique.

b. Choose the method from those listed in (a) that you believe is best, and explain any adjustments that might be necessary to prepare a more reliable transfer price.

Reference no: EM1377440

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