Question
Aston Electronics Corp. manufactures consumer electronic products in Canada. The variable and fixed production costs for producing each electronic circuit board is $270 and $55
Aston Electronics Corp. manufactures consumer electronic products in Canada. The variable and fixed production costs for producing each electronic circuit board is $270 and $55 respectively, and the company can sell its entire supply domestically for $400 each. The Canadian tax rate is 40%. Alternatively, Aston can ship the circuit boards to its division in Japan for further processing. Information about the Japanese product and the divisions operating environment are below: Selling price of final product $800 Shipping fees to Japan $40 Additional variable costs $230 Import duties levied on circuit board (to be paid by the Japanese division) 5% of transfer price Japanese tax rate 30% Astons management is exploring which transfer price more beneficial to the company as a whole. Assume that Canadian and Japanese tax authorities allow any transfer price suggested by Aston. Required: Show separate detailed calculations for the profit (or loss) that the Canadian and the Japanese divisions can make, if necessary, add diagrams to support your answers. (a) Assume that the transfer price is at full costs of Canadian division plus 15%. (b) Assume that there is no internal transfer between the Canadian and Japanese divisions. The Japanese division will obtain the circuit board in Japan for $360 and the Canadian division will sell the circuit board in the Canadian market. (c) If you were the head of the Japanese division, would you rather do business with the Canadian division or buy the circuit board locally in Japan? Why? Support your answer with all necessary calculations. (d) If you were the director in the headquarter of Aston, would you recommend option (a) or (b) above? Explain. Support your answer with all necessary calculations.
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