Multinational transfer pricing, global tax minimization. The Mornay Company manufactures telecommunications equipment at its Winnipeg factory. The company has marketing divisions throughout the world. A Mornay marketing division in Vienna, Austria, W imports 1,000 units of a piece of equipment called Product 4A36 from Canada. The following information is available:

Canadian income tax rate on the Canadian division’s operating income 40%

Austrian income tax rate on the Austrian division’s operating income 44%

Austrian import duty 10%

Variable manufacturing cost per unit of Product 4A36 $420 Full manufacturing cost per unit of Product 4A3 6 $600

$elling price (net of marketing and distribution costs) in Austria $900 Suppose the Canadian and Austrian tax authorities only allow transfer prices that are between the full manufacturing cost per unit and a market price of $780 based on comparable imports into Austria. The Austrian import duty is charged on the price at which the product is trans¬

ferred into Austria. Any import duty paid to the Austrian authorities is a deductible expense for calculating Austrian income taxes due.

Required 1. Calculate the after-tax operating income earned by the Canadian and Austrian divisions from transferring 1,000 units of Product 4A36 at

(a) full manufacturing cost per unit and

(b) market price of comparable imports. (Income taxes are not included in the computation of the cost-based transfer prices.)

2. Which transfer price should the Mornay Company select to minimize the total of company import duties and income taxes? Recall that the transfer price must be between the full

/ manufacturing cost per unit of $600 and the market price of $780 based on comparable

/ j imports into Austria. Explain your reasoning.