Cabano Lte., a Canadian company, imports parts from its Hungarian subsidiary that are used in the production of widgets. Part 185 costs the Hungarian subsidiary C$10.00 per unit to produce and C$2.00 per unit to ship to Cabano Lte. Cabano uses part 185 to produce widgets that it sells to other manufacturers for C$52.00 per widget. The following tax rates apply:

Hungarian income tax17%

Canadian income tax26.5%

Canadian import duty20% of invoice price

Required:

a.Determine the total amount of income taxes and import duties paid to the Canadian and Hungarian governments if part 185 is sold to Cabano Lte. at a price of C$20.00 per unit.

b.Determine the total amount of income taxes and import duties paid to the Canadian and Hungarian governments if part 185 is sold to Cabano Lte. at a price of C$30.00 per unit.

c.Explain why the results obtained in parts (a) and (b) differ.