DPAD_conversion_costs_solution

DPAD_conversion_costs_solution - 20% ($210/$1,000) of CGS...

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Domestic production activities deduction Conversion costs & the substantial in nature test - Solution Swallow Corporation sells portable air filtration systems by means of the Internet and direct mail orders. Most of the components are purchased from foreign suppliers at a cost of $800. Swallow supplies the remaining components and assembles the final product at a cost of $210. Swallows marketing, packaging, and shipping expenses total $20 per unit. Each unit is sold for $1,400. Required : 1. What is Swallow’s DPGR per unit? The full $1,400 selling price represents DPGR. The foreign components ($800) can be included as the domestic source contribution ($210) represents at least
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Unformatted text preview: 20% ($210/$1,000) of CGS and meets the safe harbor rule. 2. What is Swallows QPAI per unit? QPAI is $370 ($1,400 $800 $210 $20). Assume instead that Swallow incurred only $170 in production costs. Required : 3. What is Swallows DPGR per unit? Its QPAI per unit? As 17.5% ($170/$970) is less than 20%, the safe harbor test is not met. Therefore, DPGR and QPAI are both zero and there is no DPAD. 4. How could this have been avoided? Swallow could increase its domestic production costs enough to satisfy the safe harbor test. (possibly by bringing some of the foreign-source work home) An extra $31 to make conversion costs $201 will suffice 201/$1,000 = 20.1%....
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