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subcontractors was 93.1 percent of the Compaq U.S. standard costs
weighted to the Compaq Asia production amount. Compaq Asia
turnkey prices were 93.9 percent of the Compaq U.S. standard
cost. Thus, the relationship between Compaq Asia prices and
unrelated subcontractors prices is definite, and a reasonably
accurate adjustment can be made using these ratios.
Adjusting for minor physical differences and differences in
production time in this manner is consistent with Compaq U.S.
actual arm's-length dealings and real world experience:
unrelated subcontractor prices are directly related to Compaq
U.S. standard costs to produce the PCA's in-house. Accordingly,
a decrease of $6.4 million in the Compaq Asia aggregate price may
be warranted for physical differences and differences in
production time.
Quality is also a factor that may affect price. In this
case, however, no adjustment is necessary because the PCA's that
were purchased from Compaq Asia were of equal or greater quality
than the unrelated subcontractor PCA's.
Compaq U.S. occasionally reworked defective PCA's that were
purchased from Compaq Asia and unrelated subcontractors. In so
doing, Compaq U.S. reworked a significantly higher percentage of
unrelated subcontractors' PCA's than of Compaq Asia PCA's.
During 1991 and 1992, Compaq U.S. incurred costs of $1.3 million
to rework defective Compaq Asia PCA's. Compaq U.S. did not
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