Multinational transfer pricing, global tax minimization. Golden Bars Inc. has two divisions: 4

a. Shelby Mining Division. Operates a gold mine in the northern portion of the state of Market price of Montana in the United States. This division extracts ore of high quality with a gold-to-ore aigMantaa ratio of 1:10./ $2,151/KgCAD

b. Lethbridge Processing Division. Processes the ore coming from Shelby to extract gold.

The processing plant, located in Canada, is 100 kilometres north from Shelby.

The costs of the Shelby Mining Division are:

@ Variable costs, US$1,000 per kilogram of ore.

@ Fixed costs, US$500 per kilogram of ore.

Regardless of the international availability of ore for processing, Golden Bars has the policy of processing in Lethbridge 100% of the ore extracted in Shelby. Several gold processing companies in Montana buy ore from other local mining companies at US$2,000 per kilogram of ore. Assume that the current foreign-exchange rate is US$0.93 = $1 Cdn.

The costs of the Lethbridge Processing Division are:

@ Variable costs, $1,700 per kilogram of gold.

@ Fixed costs, $1,800 per kilogram of gold.

The kilogram of gold is sold for $27,800.

REQUIRED 1. Compute the transfer price (in $Cdn.) for one kilogram of ore transferred from the Shelby Mining Division to the Lethbridge Processing Division under two methods:

(a) 140% of full costs and

(b) market price.

2. Assume a world of no income taxes. Ten kilograms of ore are mined by the Shelby Division and then processed and sold by the Lethbridge Processing Division. Compute the operating income (in $Cdn.) for each division under each transfer pricing method in requirement 1.

3. Assume that the corporate income tax rate is 30% in the United States and 35% in Canada. Compute the after-tax operating income (in $Cdn.) for each division under each transfer pricing method in requirement 1. (Income taxes are not included in the computation of the cost-based transfer price. Golden Bars does not pay Canadian taxes on income already taxed in the United States.)

4. Which transfer pricing method in requirement 1 will maximize the total after-tax operating income of Golden Bars?

5. What factors, in addition to global tax minimization, might Golden Bars consider in choosing a transfer pricing method for transfers between its two divisions?

LO1