Assume NovaTech Innovations is a technology company that produces a variety of $$smart$$ household appliances, like refrigerators and dishwashers that connect to the internet. NovaTech has a decentralized structure. The smart tech division produces the technology that can be embedded in various household appliances. This technology can be sold to external producers of appliances $($like GE or Whirlpool$)$ or can be transferred internally to NovaTech$$s own appliance divisions. Similarly, NovaTech$$s appliance divisions can buy similar smart tech from external supplier for $$15$ per unit. Use the following data to calculate the effects of an internal transfer of technology using a

$($a$)$ market$-$based,

$($b$)$ cost$-$based and

$($c$)$ hybrid transfer price.

NovaTech sells its smart technology to external customers for $$18$ per unit.

NovaTech$$s appliance division$$s production budget plans for $750,000$ appliances sold per year.

NovaTech$$s smart tech division produces $1,500,000$ smart technology devices per year.

The smart tech division has $$50,000$ in fixed costs and variable costs average $$7\mathrm{.}00$ per unit.

The appliance division sells appliances for $$2500.$ Fixed manufacturing costs are $$75,000.$ The cost of the smart technology will vary based on the agreed$-$upon price. Other variable costs amount to $$150$ per unit.

The full$-$cost price for the smart tech division has been set at $$10$ to include the opportunity cost for lost sales to outside customers.

Now assume that NovaTech is a global enterprise with the Smart Tech division located in the U$.$S$.,$ where there is a $21\%$ tax rate, and the appliance division located in Germany, where there is a $30\%$ tax rate.

Required:

Calculate the operating income for the smart tech division, appliance division, and NovaTech overall based only on the internal sales between the smart tech and appliance divisions using:

Market Price

Full Cost Price

Hybrid Price of $$17$ per unit

Determine which transfer price generates the largest operating income for NovaTech overall when the international tax rates are applied.