Empire Ltd

Essay

Empire Ltd. has two divisions. Division C is located in Canada where the income tax rate is 40%. Division K is located in Korea where the income tax rate is 30%. Division C produces an intermediate product at a variable cost of $100 per unit and transfer the product to Division K where it is finished and sold for $500 per unit. Variable costs in Division K is $80 per unit. Fixed costs are $75,000 per year in Division C and $90,000 per year in Division K. Assume 1,000 units are transferred annually and the minimum transfer price allowed by the Canadian tax authorities is the variable cost. Also assume operating income in each country is equal to taxable income.
Required:
a. What transfer price should be set for Empire to minimize its total income taxes? Show your calculations.
b. If Empire desires to minimize its total income taxes, calculate the amount of tax liability in each country.