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Maxco, a foreign corporation, owns 100% of Sheetco, a domestic corporation. Maxco manufactures a wide variety of sheets for worldwide distribution. Sheetco imports Maxcos finished goods for resale in the United States. Sheetcos average financial results for the last three years are as follows:

Sales...................................................... $20 million

Cost of goods sold.................................. (15 million)

Operating expenses................................. ( 4 million)

Operating profit........................................ $ 1 million

Sheetcos CFO has decided to use the comparable profits method to assess Sheetcos exposure to an IRS transfer pricing adjustment by testing the reasonableness of Sheetcos reported operating profit of $1 million. An analysis of five comparable uncontrolled U.S. distributors indicates that the ratio of operating profits to sales is the most appropriate profitability measure. After adjustments have been made to account for material differences between Sheetco and the uncontrolled distributors, the average ratio of operating profit to sales for each uncontrolled distributor is as follows: 6%, 8%, 10%, 10%, and 14%. Using this information regarding comparable uncontrolled U.S. distributors, apply the comparable profits method to assess the reasonableness of Sheetcos reported profits. In addition, if an adjustment to Sheetcos reported profits is required, compute the amount of that adjustment.

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