Chinglish Dirk (B). Encouraged by the results from the previous problem’s analysis, corporate management of Torrington Edge wishes to continue to reposition profit in Hong Kong. It is, however, facing two constraints. First, the final sales price in Great Britain must be £20,000 or less to remain competitive.

Secondly, the British tax authorities—in working with Torrington Edge’s cost accounting staff—has established a maximum transfer price allowed (from Hong Kong) of £17,800. What combination of markups do you recommend for Torrington Edge to institute?

What is the impact of this repositioning on consolidated profits on after-tax and total tax payments?

Chinglish Dirk Company (Hong Kong) exports razor blades to its wholly owned parent company, Torrington Edge (Great Britain). Hong Kong tax rates are 16% and British tax rates are 30%. Chinglish calculates its profit per container as follows (all values in British pounds).

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Direct costs Constructing Transfer Chinglish Dirk Torrington Edge (Sales) Price per Unit (British pounds) (British pounds) 16,100 10,000 Overhead 4,000 1,000 Total costs 14,000 17,100 Desired markup 2,100 2,565 Transfer price 16,100 19,665 (sales price) Income Statement Sales price 16,100,000 19,665,000 Less total costs (14,000,000) (17,100,000) Taxable income 2,100,000 2,565,000 Less taxes (336,000) (769,500) Profit, after-tax 1,764,000 1,795,500