A Canadian company with a fully owned subsidiary in Poland. The Polish subsidiary produces a potato that is specially grown for perogies. A tonne of these special potatoes have a variable cost of 100 Euros and a full cost of 120 Euros. These potatoes can be purchased on the open market in Poland for 200 Euros per tonne. A similar potato product grown on Prince Edward Island (PEI) in Canada can be purchased for $450 per tonne, but Perogy King does not prefer these PEI potatoes because they are not as creamy as the Polish potatoes.

Every year Perogy King sells 10 million packages of perogies (each package weighs one kilogram) in the Canadian market and these retail for $3.00 per package. It takes 40,000 tonnes of potatoes to make 10 million packages of perogies. The Canadian division incurs additional processing costs of $1.00 per package to make and package the perogies.

Assume the minimum transfer price allowed by the Canadian tax authorities is 200% of the variable cost and the maximum transfer price allowed by the Canadian tax authorities is the market value of the raw product (potatoes). Also assume operating income in each country is equal to taxable income.

One Euro is worth $1.50 Canadian. The marginal tax rate in Canada is 25% and in Poland is 13%.

Required:

1.)What is the Net Income for the Polish Division and the Canadian Division of Perogy King Ltd. using the market value transfer price? Show the income statement for each division in proper form. (8 marks - show your calculations for marks)

2.)What is the Net Income for the Polish Division and the Canadian Division of Perogy King Ltd. using the 200% of Variable Cost transfer price? Show the income statement for each division in proper form. (8 marks - show your calculations for marks)

3) What transfer price should be set for Perogy King Ltd. to minimize its total income taxes and maximize profit? (2 marks - show your calculations)

4.)What is the difference between the total income tax that Perogy King Ltd. has to pay between the two transfer methods? (2 marks - show your calculations)