Bharat Coal limited, based in Madhya Pradesh, India, sells high-end coal. They have 2 divisions Meghalaya Coal mining division, which mines coal in northern Meghalaya. Habiganj Coal Mining Division, which uses coal in manufacturing high end granites. The Habiganj divisions yield is 50%: It takes 2 tons of raw coal to produce 1 ton of high-end granite. Although all of the Meghalaya divisions output of 8,000 tons of coal is sent for processing in Habiganj, there is also an active market for coal in Meghalaya. The foreign exchange rate is 0.80 Rs = Tk 1. The following information is known about the two divisions: Meghalaya Coal Mining Division Variable cost per ton of raw coal 56 Rs Fixed cost per ton of raw coal 96 Rs Market price per ton of raw coal 256 Rs Tax rate 30% Rs Habiganj Coal Mining Division Variable cost per ton of raw coal 43 TK Fixed cost per ton of raw coal 115 TK Market price per ton of raw coal 1190 TK Tax rate 35% TK

1. Compute the annual pre-tax operating income, in Tk of each division under the following transfer-pricing methods: (a) 150% of full cost and (b) market price.

2. Compute the after-tax operating income, in Tk, for each division under the transfer- pricing methods in requirement 1. (Income taxes are not included in the computation

of cost-based transfer price, and Bharat Coal does not pay income tax in Tk on income already taxed in Rs.) 3. If the two division managers are compensated based on after-tax division operating income, which transfer-pricing method will each prefer? Which transfer-pricing method will maximize the total after tax operating income of Bharat Coal? 4. In addition to tax minimization, what other factors might Bharat Coal consider in choosing a transfer pricing method?