Multinational transfer pricing, effect of alternative transfer pricing methods, global income tax minimization. User Friendly Computer Inc., with headquarters in Nepean, Ontario, manufactures and sells a premium desktop computer system. User 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 internally manufactured parts and I memory devices and keyboards from the China Division

c. Canadian Division-packages and distributes desktop computer packages Each division is run as a profit centre. The costs for the work done in each division for a single desktop computer system are as follows:

Both the China and South Korea Divisions sell part of their production under a private label. The China Division sells the comparable memory/keyboard package used in each User Friendly desktop computer to a Chinese manufacturer for 3,600 yuan. The South Maiececent banal Korea division sells the comparable desktop computer package to a South Korean _ Systems, Transfer Pricing, and 12 distributor for 1 560,000 won.

REQUIRED 1. Calculate the after-tax operating income per unit earned by each division under each of the following transfer-pricing methods:

(a) market price,

(b) 200% of full cost, and

(c) 300% of variable cost. (Income taxes are not included in the computation of the cost-based transfer rices.
2% ae transfer-pricing method(s) will maximize the after-tax operating income per unit of User Friendly Computer Inc.?LO1

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China Division South Korea Division Variable costs = 1,000 yuan Fixed costs = 1,800 yuan Variable costs = 360,000 won Canadian Division Fixed costs = 480,000 won Variable costs = 100 CAD Fixed costs = 200 CAD 40% Chinese income tax rate on China Division's operating income South Korean income tax rate on South Korea Division's operating income Canadian income tax rate on Canadian Division's operating income 20% 30% Each desktop computer package is sold to retail outlets in Canada for $3,200. Assume that the current foreign exchange rates are: 8 yuan = $1 Cdn. 1,200 won $1 Cdn.