Global, Incorporated, has received an order for 1000 widgets, with a total order value of $100 million, to be delivered to a customer in country Beta. The order was generated by Global's subsidiary in country Beta, called Global-B. Global-A, which is Global's subsidiary in country Alpha, produces the widgets and ships them to Global-B. Assume that there are no transportation or other expenses associated with moving widgets from Global-A to Global-B. Global-A incurs direct costs of $50 million for producing 1000 widgets and there are no other variable costs associated with producing and delivering these 1000 widgets to Global-B. Global-B incurs $10 million in costs associated with marketing, sales, and support of this order, and has no other variable costs attributable to this order except the amount that they pay Global-A for the widgets. Country Alpha has a corporate income tax rate of 30 percent, and country Beta has a rate of 40 percent. Global-A suggests that its selling price to Global-B should be cost plus 40 percent, which is the same price level it used for a shipment of widgets to another company. What will be the implications for Global-A and Global-B if this change is made, in terms of taxes paid and after-tax profit? Please show how you calculated this.
Global, Incorporated, has received an order for 1000 widgets, with a total order value of $100 million, to be delivered to a customer in country Beta. The order was generated by Global's subsidiary in country Beta, called Global-B. Global-A, which is Global's subsidiary in country Alpha, produces the widgets and ships them to Global-B. Assume that there are no transportation or other expenses associated with moving widgets from Global-A to Global-B.
Global-A incurs direct costs of $50 million for producing 1000 widgets and there are no other variable costs associated with producing and delivering these 1000 widgets to Global-B. Global-B incurs $10 million in costs associated with marketing, sales, and support of this order, and has no other variable costs attributable to this order except the amount that they pay Global-A for the widgets. Country Alpha has a corporate income tax rate of 30 percent, and country Beta has a rate of 40 percent.
Global-A suggests that its selling
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