Wagons have FOUR wheels. (In contrast to one brownie per sundae.) Also, in this case there are
Question:
Wagons have FOUR wheels. (In contrast to one brownie per sundae.) Also, in this case there are tax-rate differences between the two divisions. In the video lectures, I pointed out that the company as a whole doesn’t care what the TP is if there are no tax implications. But in this case there are. The company will want to move (legally—using a TP within the range) income to the lowest-tax country. (See pp. 784-786 of text for more help if needed.)
Wagonco has two divisions: Wheels and Wagons. Each wagon needs four wheels. Fixed costs = 0.
Wheels | Wagons | |
Sales/Market Price | $5 per wheel | $50 per wagon |
VC | $3 per wheel | $22.50 per wagon, not including the cost of wheels (four wheels per wagon) |
Items sold to outside market | 2,250 wheels per month | 800 per month |
Capacity | 5,000 wheels per month | 800 per month |
1. If there were no tax implications, what range of transfer prices would instill goal congruence?
2. If the Wheel division is in Canada, where the marginal tax rate is 23%, and the Wagon division is in the U.S., where the marginal tax rate is 34%, what transfer price (within the range you identified in #1) will the company prefer?
3. Calculate the tax savings to the company if it uses the transfer price you calculated in #3 instead of the transfer price at the opposite end of the range you calculated in #1.
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones