Cornerstones of Cost Management 2nd Edition by Don Hansen ,Maryanne Mowen

Exercise 5

Transfer Pricing and Section 482
Sugarland, Inc., has a division in Indonesia that makes dyestuff in a variety of colors used to dye denim for jeans, and another division in the United States that manufactures denim clothing. The Dyestuff Division incurs manufacturing costs of $2.68 for one pound of powdered dye. The Clothing Division currently buys its dye powder from an outside supplier for $3.80 per pound. If the Clothing Division purchases the powder from the Indonesian division, the shipping costs will be $0.34 per pound, but sales commissions of $0.05 per pound will be avoided with an internal transfer.
Required:
1. Which Section 482 method should be used to calculate the allowable transfer price? Calculate the appropriate transfer price per pound.
2. Assume that the Clothing Division cannot buy this type of powder externally since it has an unusual formula that results in a color particular to Sugarland's jeans. Which Section 482 method should be used to calculate the allowable transfer price? Calculate the appropriate transfer price per pound.