A Multinational Enterprise Produces a Component in the United Kingdom

Essay

A multinational enterprise produces a component in the United Kingdom, where the corporate income tax rate is 60 percent. It produces its final product in Taiwan, where the corporate income tax rate is 25 percent. The cost of the component produced in the United Kingdom is $4 per unit. The components can be shipped to Taiwan at almost no cost, and there is no tariff on the component when it is imported into Taiwan. Each unit of the final product requires one unit of the component. Other production costs in Taiwan to complete the final product are $14 per unit. The final product price, when it is sold by the Taiwan affiliate to outside buyers, is $20 per unit. If the goal of the multinational enterprise is to maximize its global after tax profit, which of the following three choices should the controller of the multinational enterprise favor? Why?
a.Charge a transfer price of $4 per unit
b.Charge a transfer price of $5 per unit
c.Charge a transfer price of $6 per unit