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The material component for the spell is magical reagents worth the cost difference between a normal item and the equivalent masterwork item (typically 300 gp for a weapon, 150 gp for armor, or 50 gp for a tool). If an object has multiple masterwork options (such as a double weapon, or a spiked shield that could be made masterwork as a weapon or armor), you choose one option of the object to affect (though you can cast the spell again to affect another option).
OK, so I can convert 50 arrows into masterwork arrows for 300GP. Does the MTW arrows' +1 bonus to attack stack with the MTW +1 bonus of the bow (if MTW)? I never thought I would ever pay 300GP for a masterwork arrow : )

Gobo Horde |

Not quite correct.
You would pay 250gp to transform 50 arrows into masterwork arrows.
It would also not stack with the bonus from a MWK bow (note, MWK and magic are different things, just FYI)
Afterwards you would have to enhance either or to turn it into magical arrows/bow
Edit: ah, yes, you would also pay 2.5gp (not 50) for the arrows themselves. Normally you would just buy mwk weapons/arrows, the spell lets you upgrade your current gear into MWK (and later magical) equipment rather than having to buy a brand new bow, just to upgrade it.

RDM42 |
** spoiler omitted **
OK, so I can convert 50 arrows into masterwork arrows for 300GP. Does the MTW arrows' +1 bonus to attack stack with the MTW +1 bonus of the bow (if MTW)? I never thought I would ever pay 300GP for a masterwork arrow : )
Then aren't you paying 6GP for a masterwork arrow, not 300? (300/50=6)