Question
Amazing Apparatus Company is a multinational organization. Its Manufacturing Division is located in the UAE while its Distribution Division is located in Bulgaria. The Manufacturing
Amazing Apparatus Company is a multinational organization. Its Manufacturing Division is located in the UAE while its Distribution Division is located in Bulgaria. The Manufacturing Division produces Mauve Metal Mugs. Fifty percent of Mauve Metal Mugs are transferred to the Distribution division in Bulgaria, while the other 50% are sold in the UAE.
During the current year the Manufacturing Division (located in the UAE) incurred the following production costs to manufacture mauve metal 1,000,000, parts exported to Bulgaria:
- Direct Cost for Material $20,000,000;
- Direct Cost for Labor $15,000,000;
- Variable Manufacturing $5,000,000; or
- $40 per part.
The Manufacturing Division sells the parts for $65 in the UAE. The Bulgarian Distribution Division takes the parts and spends:
- $1,000,000 to have the parts transported to Bulgaria;
- $3,000,000 to have the parts assembled; and
- $1,000,000 for marketing.
They then sell them as Bulgarian Beer Mugs at $100 apiece. The Bulgarian Division could purchase the mugs in Bulgaria at $50 Per mug with no transportation cost. Bulgaria has a 10% Corporate Tax Rate. The UAE has a 55% Corporate Tax Rate.
What Transfer Price is most advantageous to the Amazing Apparatus for the 1,000,000 mugs?
Possible Prices:
- Variable Cost $40 per part
- Market Price $65 (UAE)
- Just Buy it in Bulgaria for $ 50 per mug (so no transportation Cost.)
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