A Swedish Telephone Maker Transfers Phones Costing $10 to Produce

Multiple Choice

A Swedish telephone maker transfers phones costing $10 to produce to its Canadian subsidiary for a transfer price of $20. The Canadian subsidiary sells the phones to retailers for $25 each and spends $5 per phone in promotion and distribution expenses. What is the outcome for the Canadian subsidiary?

A) It makes $10, on which it pays Canadian taxes.
B) It makes $15, all of which is taxable in Canada.
C) It breaks even on the deal because it spends all its revenues.
D) It makes a total of $25 on the deal because the phones are effectively free.