HORNGRENS COST ACCOUNTING W/ACCESS
16th Edition
ISBN: 9781323687604
Author: Datar
Publisher: PEARSON
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Textbook Question
Chapter 22, Problem 22.20E
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:
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.
- A. Calculate the after-tax operating income per unit earned by each division under the following transfer-pricing methods: (a) market price, (b) 200% of full cost, and (c) 350% of variable cost. (Income taxes are not included in the computation of the cost-based transfer prices.)
- B. Which transfer-pricing method(s) will maximize the after-tax operating income per unit of Tech Friendly Computer?
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Transfer Pricing; International Considerations; Strategy As indicated in the chapter, determining the appropriate transfer price in a multinational setting is a very complex problem, with multiple strategic considerations. Consider as an example a U.S. company with a subsidiary in Italy and asubsidiary in Ireland. The Italian subsidiary produces a product at a cost of $1,000 per unit. This unitis then sold to the Irish subsidiary, which adds $100 of cost to each unit. The unit is then shipped tothe U.S. parent company, which adds an additional $100 of cost to each unit. The unit is then sold to aU.S. customer for $2,000. Assume that the tax rate in Italy is 30%, the tax rate in Ireland is 15%, andthe tax rate in the United States is 35%.Required1. Define the term transfer price. Why is transfer pricing strategically important to organizations?2. What creates income tax planning opportunities when determining transfer prices in a multinational setting? Where could one go to obtain…
Question
What does International transfer pricing generally entail ?
Select an answer:
( A ) the premium (ar tax) charged when products are moved across international borders
( B ) factoring in the various tax rates of the jurisdictions from where a product is coming from and where it is going to
( C ) a corporation selling products a different prices in different countries
( D ) a corporation selling products from one division of the corporation to another division of the corporation located in a different country
Chapter 22 Solutions
HORNGRENS COST ACCOUNTING W/ACCESS
Ch. 22 - Prob. 22.1QCh. 22 - Describe three criteria you would use to evaluate...Ch. 22 - What is the relationship among motivation, goal...Ch. 22 - Name three benefits and two costs of...Ch. 22 - Organizations typically adopt a consistent...Ch. 22 - Transfer pricing is confined to profit centers. Do...Ch. 22 - What are the three methods for determining...Ch. 22 - What properties should transfer-pricing systems...Ch. 22 - All transfer-pricing methods give the same...Ch. 22 - Prob. 22.10Q
Ch. 22 - Prob. 22.11QCh. 22 - Prob. 22.12QCh. 22 - Prob. 22.13QCh. 22 - Under the general guideline for transfer pricing,...Ch. 22 - How should managers consider income tax issues...Ch. 22 - Evaluating management control systems, balanced...Ch. 22 - Cost centers, profit centers, decentralization,...Ch. 22 - Prob. 22.18ECh. 22 - Prob. 22.19ECh. 22 - Multinational transfer pricing, effect of...Ch. 22 - Prob. 22.21ECh. 22 - Multinational transfer pricing, global tax...Ch. 22 - Prob. 22.23ECh. 22 - Prob. 22.24ECh. 22 - Transfer-pricing problem (continuation of 22-24)....Ch. 22 - Prob. 22.26PCh. 22 - Prob. 22.27PCh. 22 - Effect of alternative transfer-pricing methods on...Ch. 22 - Goal-congruence problems with cost-plus...Ch. 22 - Multinational transfer pricing, global tax...Ch. 22 - Transfer pricing, external market, goal...Ch. 22 - Prob. 22.32PCh. 22 - Transfer pricing, goal congruence, ethics. Cocoa...Ch. 22 - Prob. 22.34PCh. 22 - Transfer pricing, perfect and imperfect markets....Ch. 22 - Prob. 22.36PCh. 22 - Prob. 22.37P
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