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Conversion costs (direct labor and
factory burden).......................
70
Total cost of goods sold...............
210
Gross profit................................... 190
Administrative and selling expenses............ 50
Taxable income................................. 140
The conversion costs incurred by A Corporation are more
than 20 percent of total costs of goods sold ($70/$210
or 33 percent). Although the product sold, an engine,
is not sufficiently distinguishable from the components
to constitute a substantial transformation of the
purchased parts within the meaning of subdivision (ii)
of this subparagraph, A Corporation will be considered
under this subdivision to have manufactured the product
it sells.
Example (2). Controlled foreign corporation B,
incorporated under the laws of foreign country X,
operates an automobile assembly plant. In connection
with such activity, B Corporation purchases from re-
lated persons assembled engines, transmissions, and
certain other components, all of which are manufactured
outside of country X; purchases additional components
from unrelated persons; conducts stamping, machining,
and subassembly operations; and has a substantial
investment in tools, jigs, welding equipment, and other
machinery and equipment used in the assembly of an
automobile. On a per unit basis, B Corporation's
selling price and costs of such automobiles are as
follows:
Selling price................................ $2,500
Cost of goods sold:
Material--
Acquired from related
persons................ $1,200
Acquired from others..... 275
Total material............... $1,475
Conversion costs (direct labor and
factory burden).................. 325
Total cost of goods sold.............
1,800
Gross profit................................. 700
Administrative and selling expenses.......... 300
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