KITCHEN PRO GmbH is a successful German-based multinational provider of high-end integrated kitchen systems. KITCHEN PRO purchases microwaves, ovens, refrigerators etc., and sells them to household consumers worldwide. KITCHEN PRO reports its financial statements in Euro (€). In early 2020 KITCHEN PRO is considering an acquisition of a Singapore-based company, ACE, because it wishes to fully control ACE’s wafflemaker and frying pan production and sales. KITCHEN PRO wants to include ACE’s products in its integrated kitchen offerings. In particular, KITCHEN PRO plans to sell ACE’s products exclusively as part of its kitchen systems, i.e. there shall be no external sales of ACE’s wafflemakers and frying pans following such an acquisition. The Questions : (a) KITCHEN PRO’s finance manager is aware that Singapore’s corporate income tax rate is lower than that of Germany. She must determine the transfer price of ACE’s (future,once acquired) internal Singapore Dollar (S$)-denominated sales of wafflemakers and frying pans to KITCHEN PRO. (i) Recommend a transfer pricing strategy that will maximize KITCHEN PRO’s €- denominated Group profits. (ii) Discuss also any considerations i.e. how such transfer pricing policy might be affected by S$/€ currency fluctuations, particularly when the S$ depreciates (weakens) or appreciates (strengthens) against the €.
Question 1 – Transfer pricing, break-even and variance calculation.
KITCHEN PRO GmbH is a successful German-based multinational provider of high-end integrated kitchen systems. KITCHEN PRO purchases microwaves, ovens, refrigerators etc., and sells them to household consumers worldwide. KITCHEN PRO reports its financial statements in Euro (€). In early 2020 KITCHEN PRO is considering an acquisition of a Singapore-based company, ACE, because it wishes to fully control ACE’s wafflemaker and frying pan production and sales. KITCHEN PRO wants to include ACE’s products in its integrated kitchen offerings. In particular,
KITCHEN PRO plans to sell ACE’s products exclusively as part of its kitchen systems, i.e. there shall be no external sales of ACE’s wafflemakers and frying pans following such an acquisition.
The Questions :
(a) KITCHEN PRO’s finance manager is aware that Singapore’s corporate income tax rate is lower than that of Germany. She must determine the transfer price of ACE’s (future,once acquired) internal Singapore Dollar (S$)-denominated sales of wafflemakers and frying pans to KITCHEN PRO.
(i) Recommend a transfer pricing strategy that will maximize KITCHEN PRO’s €- denominated Group profits.
(ii) Discuss also any considerations i.e. how such transfer pricing policy might be affected by S$/€ currency fluctuations, particularly when the S$
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