Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 16

Transfer Pricing International Example A subsidiary company located in country A purchases $100 worth of goods. It then repackages, exports, and sells those goods to the parent company, located in country B, for $200. The parent company sells the goods for $300. Therefore, both entities have a $100 profit. Assume that the income tax rate in country A is 20%, while the tax rate in country B is 60%.
Required
1. Given the above facts and assumptions, what is the company's combined (i.e., worldwide) after-tax income per unit for this transaction (Show calculations.)
2. Consider now a transfer-pricing approach in which the subsidiary sells the goods to the parent company for $280, and the parent company then sells the goods for $300. What is the revised worldwide (i.e., combined) after-tax profit per unit for this transaction (Show calculations.)
3. What is the effect of the transfer-pricing decision when the income tax rates for the two countries in question are equal
4. What limitations exist regarding the setting of transfer prices for multinational transfers