Company GLM produces a product that consists of two parts. The first part is produced by a subsidiary in country A at $5 per unit. The second part is being produced by another subsidiary in country B at $7 per unit. They are assembled by another one of GLM’s subsidiaries in country C at a cost of $5 per unit.
GLM is considering selling the product in country C at $25 per unit, or selling it to country D at the same price ($25 per unit). Shipping the product to D will cost $1 per unit. The tax rates in these four countries are:
A = 15%
B = 20%
C = 10%
D = 0% (no tax)
GLM’s management has to answer two questions:
(1) What transfer prices should be used by subsidiaries A and B when they charge subsidiary C?
(2) Should the product be sold in country C or D?
Show all your calculation. GLM is trying to maximize its aggregate after tax profits.