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L15 L16 Problems on TP

L15 L16 Problems on TP

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Published by: api-3820619 on Oct 18, 2008
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03/18/2014

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Considerations/Issues in TP
Taxation \u2013 tax heavens, double taxations
Govt. Regulations \u2013 Arms length price (in absence of
which BU can set TP to minimize the tax liability)
Tariffs \u2013 They are certain % of import value,
therefore lower the TP lower will be the tariffs.
Foreign Exchange Control \u2013 e.g. limit on FE

spending for import.
Shifting of funds to desired location.
Joint Ventures \u2013 May enforce the specific TP.
Transaction, Operation and Economic exposure to

ER.
Problem on cost based transfer pricing \u2013

ABC Co Ltd has received an enquiry for the supply of 1000 units steel
chairs. Company\u2019s division A has got capacity to produce these many
chairs, but it has to incur fixed investment of Rs 400000 and working
capacity to the extent of 25% of the sale value will be required if the
job is undertaken. The costs are estimated as follows \u2013

Raw material 11000 Kg @ Rs20 per Kg
Direct wages 1000 hours @ Rs 10 per hour
Variable Overheads -

Factory Rs 15 per labor hour
Selling & Distribution Rs 20000
Fixed Overheads -
Factory Rs 10000

Selling & Distribution Rs 45000
Prepare a statement showing the price to be fixed under \u2013
\u2022Total cost method using i. 30% on the total cost and ii. 20% on S. Price
\u2022b. Conversion cost method \u2013 200% conversion cost as profit
c. Marginal cost method assuming a P/V ratio of 35%
d. Return on investment method with an expected return of 20% on the

capital employed
Solution \u2013
For 1000 units
Per unit
Direct Material (11000*20)
220000
220
Direct Wages (1000*10)
10000
10
Prime Cost
230000
230
Factory O/H(1000*15 +
10000)
25000
25
Cost of Mfg.
255000
255
Selling & Distri. O/H
65000
65
Total Cost
320000
320
Profit(30% on total cost)
96000
96
Sale
416000
416

i. When the profit is 30% on the total cost, price will be Rs 416 per unit
ii. When profit is 20% on sales, i.e. profit is 25 of cost, hence
Selling Price = 320 + (320 * 25%)

=
a. Total cost method \u2013

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