North Italy mining division, which mines potash in northern Italy - U.S. processing division, which uses potash in manufacturing top-grade fertilizer The processing division's yield is 50%: It takes 2 tons of raw potash to produce 1 ton of top-grade fertilizer. Although all of the mining division's output of 8,000 tons of potash is sent for processing in the United States, there is also an active market for potash in Italy. The foreign exchange rate is 0.80 Euro = $1 U.S. The fol- lowing information is known about the two divisions: Home Insert Page Layout Formulas Data Review North Italy Mining Division 2 Variable cost per ton of raw potash 3 Fixed cost per ton of raw potash 4 Market price per ton of raw potash 5 Tax rate 56 EURO 96 EURO 256 EURO 30% U.S. Processing Division 8 Variable cost per ton of fertilizer 9 Fixed cost per ton of fertilizer 43 U.S. dollars 115 U.S. dollars 10 Market price per ton of fertilizer 1,190| U.S. dollars 11 Tax rate 35% 1. Compute the annual pretax operating income, in U.S. dollars, of each division under the following transfer-pricing methods: (a) 150% of full cost and (b) market price. 2. Compute the after-tax operating income, in U.S. dollars, methods in requirement 1. (Income taxes are not included in the computation of cost-based transfer price, and Express Grow does not pay U.S. income tax on income already taxed in Italy.) 3. If the two division managers are compensated based on after-tax division operating income, which transfer-pricing method will each prefer? Which transfer-pricing method will maximize the total after- tax operating income of Express Grow? 4. In addition to tax minimization, what other factors might Express Grow consider in choosing a transfer- pricing method? Required each division under the transfer-pricing
North Italy mining division, which mines potash in northern Italy - U.S. processing division, which uses potash in manufacturing top-grade fertilizer The processing division's yield is 50%: It takes 2 tons of raw potash to produce 1 ton of top-grade fertilizer. Although all of the mining division's output of 8,000 tons of potash is sent for processing in the United States, there is also an active market for potash in Italy. The foreign exchange rate is 0.80 Euro = $1 U.S. The fol- lowing information is known about the two divisions: Home Insert Page Layout Formulas Data Review North Italy Mining Division 2 Variable cost per ton of raw potash 3 Fixed cost per ton of raw potash 4 Market price per ton of raw potash 5 Tax rate 56 EURO 96 EURO 256 EURO 30% U.S. Processing Division 8 Variable cost per ton of fertilizer 9 Fixed cost per ton of fertilizer 43 U.S. dollars 115 U.S. dollars 10 Market price per ton of fertilizer 1,190| U.S. dollars 11 Tax rate 35% 1. Compute the annual pretax operating income, in U.S. dollars, of each division under the following transfer-pricing methods: (a) 150% of full cost and (b) market price. 2. Compute the after-tax operating income, in U.S. dollars, methods in requirement 1. (Income taxes are not included in the computation of cost-based transfer price, and Express Grow does not pay U.S. income tax on income already taxed in Italy.) 3. If the two division managers are compensated based on after-tax division operating income, which transfer-pricing method will each prefer? Which transfer-pricing method will maximize the total after- tax operating income of Express Grow? 4. In addition to tax minimization, what other factors might Express Grow consider in choosing a transfer- pricing method? Required each division under the transfer-pricing
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Multinational transfer pricing, global tax minimization. Express Grow Inc., based in Ankeny, Iowa, sells high-end fertilizers. Express Grow has two divisions:
Transcribed Image Text:North Italy mining division, which mines potash in northern Italy
- U.S. processing division, which uses potash in manufacturing top-grade fertilizer
The processing division's yield is 50%: It takes 2 tons of raw potash to produce 1 ton of top-grade fertilizer.
Although all of the mining division's output of 8,000 tons of potash is sent for processing in the United States,
there is also an active market for potash in Italy. The foreign exchange rate is 0.80 Euro = $1 U.S. The fol-
lowing information is known about the two divisions:
Home
Insert
Page Layout
Formulas
Data
Review
North Italy Mining Division
2 Variable cost per ton of raw potash
3 Fixed cost per ton of raw potash
4 Market price per ton of raw potash
5 Tax rate
56
EURO
96 EURO
256
EURO
30%
U.S. Processing Division
8 Variable cost per ton of fertilizer
9 Fixed cost per ton of fertilizer
43
U.S. dollars
115
U.S. dollars
10 Market price per ton of fertilizer
1,190| U.S. dollars
11 Tax rate
35%
Transcribed Image Text:1. Compute the annual pretax operating income, in U.S. dollars, of each division under the following
transfer-pricing methods: (a) 150% of full cost and (b) market price.
2. Compute the after-tax operating income, in U.S. dollars,
methods in requirement 1. (Income taxes are not included in the computation of cost-based transfer
price, and Express Grow does not pay U.S. income tax on income already taxed in Italy.)
3. If the two division managers are compensated based on after-tax division operating income, which
transfer-pricing method will each prefer? Which transfer-pricing method will maximize the total after-
tax operating income of Express Grow?
4. In addition to tax minimization, what other factors might Express Grow consider in choosing a transfer-
pricing method?
Required
each division under the transfer-pricing
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education