Compaq Computer Corporation and Subsidiaries - Page 39




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          and 1992, the appropriate adjustment for duty costs was to reduce           
          Compaq Asia prices by $1.2 million to make them comparable with             
          unrelated subcontractor prices.                                             
               Compaq U.S. paid unrelated subcontractors for setup and                
          cancellation charges but did not pay Compaq Asia for similar                
          costs.  Thus, at arm's length, an adjustment must be made for the           
          setup and cancellation charges paid to the unrelated                        
          subcontractors.  According to petitioner, for 1991 and 1992, the            
          appropriate adjustment for the setup and cancellation charges was           
          a $2.9 million increase in Compaq Asia prices.                              
               Regarding material inventories, petitioner argues that                 
          Compaq Asia had more at risk than did unrelated subcontractors,             
          because Compaq Asia purchased materials and components based on a           
          nonbinding forecast.  Accordingly, if either demand or design for           
          a PCA changed, Compaq Asia bore the risk that its materials and             
          components inventory would not be used or would become obsolete.            
          The unrelated subcontractors, on the other hand, waited until               
          they received a firm purchase order before they committed to                
          buying materials and components.  Furthermore, Compaq U.S.                  
          contractually committed to be responsible for the materials and             
          components inventories in the event that demand or design                   
          changed.  Thus, Compaq U.S. and not the unrelated subcontractors            
          bore the risk that design or demand would change.  At arm's                 
          length, an adjustment is required to reflect the risks and costs            





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