Answer to Question #91676 in Economics for lydia momanyi

Question

Targaryen Ltd and Greyjoy Ltd are associated parties. Greyjoy Ltd is engaged in the manufacture of electrical goods of varied range. One of such goods is heating element which it sells to Targaryen Ltd which is engaged in the manufacture of electrical heaters where it uses the heating element purchased from Greyjoy Ltd as a raw material. Greyjoy Ltd is not selling the heating element to any of its other customers. Few comparable companies are available which are engaged in manufacturing similar products (heating elements) realizing an average mark-up of 10%.
The cost of manufacturing one heating element is Shs 5,000.

i) Which transfer pricing method is most appropriate (2 marks)
ii) Calculate the transfer price. (4 marks)

Answer 1

i) The appropriate transfer pricing method is the cost plus method.

ii) The transfer price is: 5,000×(1 + 0.1) = 5,500.