seekingmathhelp
New member
- Joined
- Mar 26, 2015
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Here is the problem:
Phipps manufactures circuit boards in Division A, a country with a 30% income tax rate, and transfers them to Division B, a country with a 40% income tax. An import duty of 15% of the transfer price is paid on all imported products. The import duty is not deductible in computing taxable income. The circuit boards' full cost is $1,000 and variable cost is $700; they are sold by Division B for $1,200. The tax authorities in both countries allow firms to use either variable cost or full cost as the transfer price. Analyze the effect of full-cost and variable-cost transfer pricing methods on Phipps' cash flows.
Where I am struggling:
1.) To determine the taxes in Division B, do I just add the income taxes ($80) with the import duty ($150)?
2.) I am having trouble figuring out the Division A stuff all together. Is the cost $1,000 and $700? And if so, then what is the transfer price?
Phipps manufactures circuit boards in Division A, a country with a 30% income tax rate, and transfers them to Division B, a country with a 40% income tax. An import duty of 15% of the transfer price is paid on all imported products. The import duty is not deductible in computing taxable income. The circuit boards' full cost is $1,000 and variable cost is $700; they are sold by Division B for $1,200. The tax authorities in both countries allow firms to use either variable cost or full cost as the transfer price. Analyze the effect of full-cost and variable-cost transfer pricing methods on Phipps' cash flows.
Where I am struggling:
1.) To determine the taxes in Division B, do I just add the income taxes ($80) with the import duty ($150)?
2.) I am having trouble figuring out the Division A stuff all together. Is the cost $1,000 and $700? And if so, then what is the transfer price?
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