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North Italy mining division, which mines potash in northern Italy - U.S. processing division, which uses potash in manufacturing top-grade fertilizer The processing division's yield is 50%: It takes 2 tons of raw potash to produce 1 ton of top-grade fertilizer. Although all of the mining division's output of 8,000 tons of potash is sent for processing in the United States, there is also an active market for potash in Italy. The foreign exchange rate is 0.80 Euro = $1 U.S. The fol- lowing information is known about the two divisions: Home Insert Page Layout Formulas Data Review North Italy Mining Division 2 Variable cost per ton of raw potash 3 Fixed cost per ton of raw potash 4 Market price per ton of raw potash 5 Tax rate 56 EURO 96 EURO 256 EURO 30% U.S. Processing Division 8 Variable cost per ton of fertilizer 9 Fixed cost per ton of fertilizer 43 U.S. dollars 115 U.S. dollars 10 Market price per ton of fertilizer 1,190| U.S. dollars 11 Tax rate 35% 1. Compute the annual pretax operating income, in U.S. dollars, of each division under the following transfer-pricing methods: (a) 150% of full cost and (b) market price. 2. Compute the after-tax operating income, in U.S. dollars, methods in requirement 1. (Income taxes are not included in the computation of cost-based transfer price, and Express Grow does not pay U.S. income tax on income already taxed in Italy.) 3. If the two division managers are compensated based on after-tax division operating income, which transfer-pricing method will each prefer? Which transfer-pricing method will maximize the total after- tax operating income of Express Grow? 4. In addition to tax minimization, what other factors might Express Grow consider in choosing a transfer- pricing method? Required each division under the transfer-pricing

North Italy mining division, which mines potash in northern Italy - U.S. processing division, which uses potash in manufacturing top-grade fertilizer The processing division's yield is 50%: It takes 2 tons of raw potash to produce 1 ton of top-grade fertilizer. Although all of the mining division's output of 8,000 tons of potash is sent for processing in the United States, there is also an active market for potash in Italy. The foreign exchange rate is 0.80 Euro = $1 U.S. The fol- lowing information is known about the two divisions: Home Insert Page Layout Formulas Data Review North Italy Mining Division 2 Variable cost per ton of raw potash 3 Fixed cost per ton of raw potash 4 Market price per ton of raw potash 5 Tax rate 56 EURO 96 EURO 256 EURO 30% U.S. Processing Division 8 Variable cost per ton of fertilizer 9 Fixed cost per ton of fertilizer 43 U.S. dollars 115 U.S. dollars 10 Market price per ton of fertilizer 1,190| U.S. dollars 11 Tax rate 35% 1. Compute the annual pretax operating income, in U.S. dollars, of each division under the following transfer-pricing methods: (a) 150% of full cost and (b) market price. 2. Compute the after-tax operating income, in U.S. dollars, methods in requirement 1. (Income taxes are not included in the computation of cost-based transfer price, and Express Grow does not pay U.S. income tax on income already taxed in Italy.) 3. If the two division managers are compensated based on after-tax division operating income, which transfer-pricing method will each prefer? Which transfer-pricing method will maximize the total after- tax operating income of Express Grow? 4. In addition to tax minimization, what other factors might Express Grow consider in choosing a transfer- pricing method? Required each division under the transfer-pricing

Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter3: Cost Behavior
Section: Chapter Questions
Problem 11E: Cashion Company produces chemical mixtures for veterinary pharmaceutical companies. Its factory has...
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Multinational transfer pricing, global tax minimization. Express Grow Inc., based in Ankeny, Iowa, sells high-end fertilizers. Express Grow has two divisions:

North Italy mining division, which mines potash in northern Italy - U.S. processing division, which uses potash in manufacturing top-grade fertilizer The processing division's yield is 50%: It takes 2 tons of raw potash to produce 1 ton of top-grade fertilizer. Although all of the mining division's output of 8,000 tons of potash is sent for processing in the United States, there is also an active market for potash in Italy. The foreign exchange rate is 0.80 Euro = $1 U.S. The fol- lowing information is known about the two divisions: Home Insert Page Layout Formulas Data Review North Italy Mining Division 2 Variable cost per ton of raw potash 3 Fixed cost per ton of raw potash 4 Market price per ton of raw potash 5 Tax rate 56 EURO 96 EURO 256 EURO 30% U.S. Processing Division 8 Variable cost per ton of fertilizer 9 Fixed cost per ton of fertilizer 43 U.S. dollars 115 U.S. dollars 10 Market price per ton of fertilizer 1,190| U.S. dollars 11 Tax rate 35%
Transcribed Image Text:North Italy mining division, which mines potash in northern Italy - U.S. processing division, which uses potash in manufacturing top-grade fertilizer The processing division's yield is 50%: It takes 2 tons of raw potash to produce 1 ton of top-grade fertilizer. Although all of the mining division's output of 8,000 tons of potash is sent for processing in the United States, there is also an active market for potash in Italy. The foreign exchange rate is 0.80 Euro = $1 U.S. The fol- lowing information is known about the two divisions: Home Insert Page Layout Formulas Data Review North Italy Mining Division 2 Variable cost per ton of raw potash 3 Fixed cost per ton of raw potash 4 Market price per ton of raw potash 5 Tax rate 56 EURO 96 EURO 256 EURO 30% U.S. Processing Division 8 Variable cost per ton of fertilizer 9 Fixed cost per ton of fertilizer 43 U.S. dollars 115 U.S. dollars 10 Market price per ton of fertilizer 1,190| U.S. dollars 11 Tax rate 35%
1. Compute the annual pretax operating income, in U.S. dollars, of each division under the following transfer-pricing methods: (a) 150% of full cost and (b) market price. 2. Compute the after-tax operating income, in U.S. dollars, methods in requirement 1. (Income taxes are not included in the computation of cost-based transfer price, and Express Grow does not pay U.S. income tax on income already taxed in Italy.) 3. If the two division managers are compensated based on after-tax division operating income, which transfer-pricing method will each prefer? Which transfer-pricing method will maximize the total after- tax operating income of Express Grow? 4. In addition to tax minimization, what other factors might Express Grow consider in choosing a transfer- pricing method? Required each division under the transfer-pricing
Transcribed Image Text:1. Compute the annual pretax operating income, in U.S. dollars, of each division under the following transfer-pricing methods: (a) 150% of full cost and (b) market price. 2. Compute the after-tax operating income, in U.S. dollars, methods in requirement 1. (Income taxes are not included in the computation of cost-based transfer price, and Express Grow does not pay U.S. income tax on income already taxed in Italy.) 3. If the two division managers are compensated based on after-tax division operating income, which transfer-pricing method will each prefer? Which transfer-pricing method will maximize the total after- tax operating income of Express Grow? 4. In addition to tax minimization, what other factors might Express Grow consider in choosing a transfer- pricing method? Required each division under the transfer-pricing
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