Acme, Inc., a U.S. C corporation, manufactures goods at its U.S. factory for sale in the United States and abroad. Acme has established an IC-DISC. During the current year, Acmes qualified export receipts are $4,000 (all amounts in thousands), and the related cost of

goods sold is $2,400. Acme has $1,200 of selling, general and administrative (SG&A) expenses related to the qualified export receipts. Acmes gross receipts from domestic sales are $96,000, the related cost of goods sold is $65,600, and the related SG&A expenses are

$18,800. In sum, Acmes results for the year (before considering any income allocated to its IC-DISC via a commission payment), are as follows:

Qualified

Total export receipts Other sales

Gross receipts $100,000 $4,000 $96,000

COGS (direct material and labor) (68,000) (2,400) (65,600)

Gross profit $32,000 $1,600 $30,400

SG&A expenses (20,000) (1,200) (18,800)

Net income $12,000 $400 $11,600

To determine its IC-DISC benefits, Acme prefers not to use the arms length amount determined under the transfer pricing principles to avoid additional scrutiny by the tax authorities.

Using the qualified export receipts method and the combined taxable income method, what is the maximum amount of income that Acme can allocate to its IC-DISC under the following two independent assumptions?

1. The Full Costing approach. (30 Marks)
2. Alice who is the International Tax Planning Director of Acme wants to know if the company should elect the Marginal Costing approach for its IC-DISC. However, she is concerned about the effect of the overall profit percentage limitation. As an expert, you are convinced that electing the marginal costing approach would be beneficial to Acme. Not so convinced, Alice requires you to show her the numbers and justify why you believe that Acme should elect marginal costing instead of the full costing in (i) above. (50 Marks)