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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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