Estimate arm’s length transfer price for a large firm A large international industrial manufacturer (€4 billion sales turnover, 20 000 employees) is preparing its proposal for the transfer price of an important, proprietary intermediate product. No comparable products are traded internationally, but a number of other large firms participate in this industry. Companies in this industry manufacture products for industrial use, including rubber and plastic products, packaging and containers, paper and paper products, and textiles. Many products in this industry are sold primarily for use by businesses rather than directly by consumers.

The company’s product cost is as follows.

1. Find a set of comparable firms.
2. Measure the inter-quartile range of gross profit margins for the comparable firms.
3. Compute a ‘safe’ proposed transfer price for the intermediate product in question. Do you think your recommended price would be influenced by whether the company is one of the most profitable in the industry? Least profitable in the industry? Explain.

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Product cost Direct materials Direct labour Manufacturing overhead Total product cost Per unit 2580 1440 4320 8340