Cost Plus Method

The Cost Plus Method (CPM) is a transfer pricing method where a reasonable gross profit margin is added to the cost of goods sold, based on the gross profit margin earned by the same company from transactions with independent parties, or based on the gross profit margin earned by other companies in comparable transactions with independent parties, in accordance with the arm's length principle.

When to Use the Cost Plus Method?

In simple terms, the Cost Plus Method is applied by comparing the gross profit margin of independent parties engaged in similar transactions with the costs incurred in related-party transactions. The ratio for calculating the gross profit margin in CPM can be determined by comparing the gross profit to the company's cost of goods sold. The appropriate conditions for applying the Cost Plus Method include:

• The sale of semi-finished goods to affiliated parties,

• Joint facility agreements or long-term buy and supply contracts between affiliated parties,

• Provision of services.

Application of the Cost Plus Method

The Cost Plus Method is applied by comparing the gross profit margin of independent parties in similar transactions with the costs incurred in related-party transactions. The gross profit margin in CPM is calculated using the following formula:

Gross Mark-up = Gross Profit ÷ Cost of Goods Sold

This method is quite similar to the Resale Price Method, as both prioritize the comparability of functions. Product differences are allowed in this method, but within certain limits. The more comparable the products, the more reliable the analysis results.

In this method, adjustments are often made for various factors such as:

• Cost structure,

• Business cycle,

• Management efficiency,

• Other factors that materially affect the gross profit mark-up.

The Cost Plus Method can be used to analyze long-term buy and supply agreements, the sale of semi-finished goods, toll manufacturing and contract manufacturing activities, contract R&D, and similar transactions.