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 Consolidated Singapore Parent Hong Kong Affiliate Company Sales revenue S$300 s$500 s$500 Cost of goods sold 200 300 200 100 Gross profit Operating expenses 200 300 50 50 100 150 200 Taxable income 50 Income taxes (20%/ 17.5 % ) 10 26 36 Net income 40 124 164