Question 1 Gold Ltd, a UK wholly-owned subsidiary of Silver plc, a USA company, supplies 1000 Y-type widgets each month to its fellow subsidiary which is tax resident in Ireland, Platinum Inc at a price of $650 per widget. The price charged by Red Ltd to unconnected customers is $1100 per widget. These widgets are in common use in most of the countries to which Gold Ltd sells, with many suppliers in the market. However, the market in Ireland is just opening up and Gold Ltd is the first supplier in it. Because Platinum Inc has detailed knowledge of the performance and reliability of the product it has agreed to forego the usual product warranties.
Additional information:
Premium for first supplier in new market $120
Absence of warranties $60
Absence of bad debt risk $40
Repeat/bulk order discount $80
Immediate payment discount $50
You are required to establish an arm’s length price using the comparable uncontrolled price method (CUP).
The adjusted arm’s length price using the comparable uncontrolled price method would be:
Price charged to unconnected customers per unit for an order of 1000 Y-type widgets - 1100
Adjustments:
Premium for first supplier in new market - 120
Absence of warranties - (60)
Absence of bad debt risk - (40)
Repeat/bulk order discount - (80)
Immediate payment discount - (50)
Adjusted arm’s length price - 990