Estimate arm’s length transfer price for a small firm A small international industrial manufacturer (€20million sales turnover, 200 employees) in a developing country 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 small 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 follows.

Required:
1. Discuss the appropriateness of the selected sample of comparable firms and what this means for defending transfer prices. Hint: see the discussion of transfer pricing in developing countries in the chapter and in the referenced article by Falcao (2012).
2. Measure the interquartile range of gross profit margins for these sample firms and compute an aggressive proposed transfer price for the intermediate product in question. Do you think your recommended price would be influenced by whether the company is more or less profitable than the sample of comparable firms? Explain.

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Product cost Direct materials Direct labour Manufacturing overhead Total product cost Per unit 1470 1650 4950 8070 You have identified a possible set of comparable firms, as follows. Company Sales, Em Employees Gross profit margin Location Gruppo Ceramiche Ricchetti S.p.A. 94.59 537 64.37% Italy Proto Labs, Inc. 98.94 511 60.25% USA Alloy Steel International, Inc. 8.82 20 49.86% Australia Permasteelisa S.p.A. 109.08 541 28.18% Italy PFB Corporation 89.45 379 20.72% Canada WSI Industries, Inc. 24.96 76 19.80% USA Immediate Response Tech., Inc. 13.50 100 15.93% USA TreeCon Resources, Inc. 13.00 145 15.75% USA