Medical Instruments, Inc., produces a variety of medical products at its plant in Halifax, Nova Scotia. The company has sales divisions worldwide. One of these sales divisions is located in Oslo, Norway. Assume that the Canadian income tax rate is 34 percent, the Norwegian rate is 60 percent, and a 15 percent import duty is imposed on medical supplies brought into Norway.
One product produced in Halifax and shipped to Norway is a heart monitor.
The variable cost of production is $350 per unit, and the fully allocated cost is $600 per unit.
1. Suppose the Norwegian government allows either the variable or fully allocated cost to be used as a transfer price. Which should Medical Instruments, Inc. choose to minimize the total of income taxes and import duties? Compute the amount the company saves if it uses your suggested transfer price instead of the alternative.
2. Suppose the Norwegian parliament passed a law decreasing the income tax rate to 50 percent and increasing the duty on heart monitors to 20 percent. Repeat requirement 1, using these new facts.