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Task 3 Transfer Pricing IEBR
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Task 3 | Carmen van der Werf | 545079A. Based on information in the case, please describe four comparability criteria that the
comparable companies should satisfy.
Contractual terms – the terms of a transaction have been documented in a contract
between the parties.
Functional Analysis - The comparable company should be performing similar
activities as SDN.
Characteristics of property or services - The comparable company should also sell
similar products, in this case mattresses.
Economic circumstances – comparable companies should ideally be situated in the
same geographic location, in this case The Netherlands. Also the size of the market,
the government regulations and the extent of competition are relevant.
Table 3.a: Income statements of comparable companies for 2019
Comparable 1 Comparable 2 Comparable 3 Comparable 4 Comparable 5
Sales 100 200 160 250 280
Cost of goods sold 81 130 118.8 192.5 237.4
Gross profit 19 70 41.2 57.5 42.6
Operating expenses 16 40 30 45 37
Operating profit 3 30 11.2 12.5 5.6
Please answer the following questions:
a. Please calculate the operating profit margin earned by the 5 comparables.
Comparable 1: 3/100 x 100% = 3%
Comparable 2: 30/200 x 100% = 15%
Comparable 3: 11.2/160 x 100% = 7%
Comparable 4: 12.5/250 x 100% = 5%
Comparable 5: 5.6/280 x 100% = 2%
b. Please explain why operating profit margin is an appropriate financial ratio in
applying the TNMM to Sweet Dreams Italy
SDI is a sales company and has operating costs. Through this method, these operating
costs are taken into consideration at calculating the ALP.
c. Please calculate the full range, inter-quartile range and median of this ratio for the
5 comparables.
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