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Multinational transfer pricing, effect of alternative transfer-pricing methods, global income tax minimization. Tech Friendly Computer, Inc., with headquarters in San Francisco, manufactures and sells a desktop computer. Tech Friendly has three divisions, each of which is located in a different country:
- a. China division—manufactures memory devices and keyboards
- b. South Korea division—assembles desktop computers using locally manufactured parts, along with memory devices and keyboards from the China division
- c. U.S. division—packages and distributes desktop computers
Each division is run as a profit center. The costs for the work done in each division for a single desktop computer are as follows:
| China division: | Variable cost = 900 yuan |
| Fixed cost = 1,980 yuan | |
| South Korea division: | Variable cost = 350,000 won |
| Fixed cost = 470,000 won | |
| U.S. division: | Variable cost = $125 |
| Fixed cost = $325 |
- Chinese income tax rate on the China division’s operating income: 40%
- South Korean income tax rate on the South Korea division’s operating income: 20%
- U.S. income tax rate on the U.S. division’s operating income: 30%
Each desktop computer is sold to retail outlets in the United States for $3,800. Assume that the current foreign exchange rates are as follows:
Both the China and the South Korea divisions sell part of their production under a private label. The China division sells the comparable memory/keyboard package used in each Tech Friendly desktop computer to a Chinese manufacturer for 4,500 yuan. The South Korea division sells the comparable desktop computer to a South Korean distributor for 1,340,000 won.
- A. Calculate the after-tax operating income per unit earned by each division under the following transfer-pricing methods: (a) market price, (b) 200% of full cost, and (c) 350% of variable cost. (Income taxes are not included in the computation of the cost-based transfer prices.)
- B. Which transfer-pricing method(s) will maximize the after-tax operating income per unit of Tech Friendly Computer?
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Chapter 22 Solutions
EBK HORNGREN'S COST ACCOUNTING
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