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: 9 yuan = $1 U.S. 1,000 won = $1 U.S. 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.
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: 9 yuan = $1 U.S. 1,000 won = $1 U.S. 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.
Chapter14: Multinational Capital Budgeting
Section: Chapter Questions
Problem 3ST
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Which transfer-pricing method(s) will maximize the after-tax operating income per unit of Tech Friendly Computer?
Transcribed Image Text: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:
9 yuan = $1 U.S.
1,000 won = $1 U.S.
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.
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