Rayland, Inc., has a division in Canada that makes paint. Rayland has another U.S. division, the Retail Division, that operates a chain of home improvement stores. The Retail Division would like to buy the unique, long-lasting paint from the Canadian division, since this type of paint is not currently available. The Paint Division incurs manufacturing costs of $4.12 for one gallon of paint.

If the Retail Division purchases the paint from the Canadian division, the shipping costs will be $0.40 per gallon, but sales commissions of $0.60 per gallon will be avoided with an internal transfer. The Retail Division plans to sell the paint for $11.68 per gallon.

Normally, the Retail Division earns a gross margin of 60 percent above cost of goods sold.

Required:

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

2. Calculate the appropriate transfer price per gallon.

LO1