5. Chinglish Dirk Company (Hong Kong) exports razor blades to its wholly owned parent company, Torrington Edge (Great Britain). Hong Kong tax rates are 12% and British tax rates are 40%. Chinglish calculates its profit per container as shown as the following baseline analysis follows (all values in British pounds). Corporate management of Torrington Edge is considering repositioning profits within the multinational company. What happens to the profits of Chinglish Dirk and Torrington Edge, and the consolidated results of both if the markup at Chinglish was increased to 30% and the markup at Torrington was reduced to 10%? What is the impact of this repositioning on consolidated tax payments? Baseline Analysis Assumptions Hong Kong Great Britain Corporate income tax rate 12.0% 40.0% Desired markup on transfers 20.0% 20.0% Volume 1,000 Constructing Transfer (Sales) Chinglish Dirk Torrington Edge Consolidated Price Per Unit (British pounds) British pounds) (British pounds) Direct costs $10,000 $16,800 Overhead 4.000 1,000 Total costs E14,000 $17,800 Desired markup 2,800 3,560 Transfer price (sales price) $16,800 121,360 Income Statement (prices x volume) Sales price $16,800,000 $21,360,000 Less total costs (14,000,000) (17,800,000) Taxable income $2,800,000 $3,560,000 Less taxes (336,000) (1,424,000) E1,760,000 Profit, after-tax $2,464,000 $2,136,000 $4,600,000