Question#2 - Transfer Pricing: Eastern Trading Company's Optimal Transfer Pricing Strategy The Eastern Trading Company of Singapore ships prepackaged spices to Hong Kong, the United Kingdom, and the United States, where they are resold by sales affili- ates. Eastern Trading is concerned with what might happen in Hong Kong now that control has been turned over to China. Eastern Trading has decided that it should reexamine its transfer pricing policy with its Hong Kong affiliate as a means of repo- sitioning funds from Hong Kong to Singapore. The following table shows the present transfer pricing scheme, based on a carton of assorted, prepackaged spices, which is the typical shipment to the Hong Kong sales affiliate. What do you recommend that Eastern Trading should do? Eastern Trading Company Current Transfer Pricing Policy with Hong Kong Sales Affiliate Singapore Parent Hong Kong Affiliate Consolidated Company S$500 S$300 200 100 200 Sales revenue Cost of goods sold Gross profit Operating expenses Taxable income Income taxes (20%/17.5%) Net income 50 S$500 300 200 _50 150 26 124 50 300 100 200 36 164