Cascade Containers is organized into two divisionsManufacturing and Distribution. Manufacturing produces a product that can be sold immediately or transferred to Distribution for further processing and then sold. Distribution only buys from Manufacturing for quality control reasons.

Manufacturing currently sells 2,400 units annually at a price of $600 per unit to outside customers. It sells an additional 1,200 units to Distribution. The unit variable cost in Manufacturing is $300 and annual fixed costs are $300,000. Manufacturing is located in a country with a 20 percent tax rate.

Distribution can sell units that have had further processing for $1,200 each. In addition to what it pays Manufacturing, the variable costs in Distribution are $150 per unit. Annual fixed costs in Distribution are $360,000. Distribution is located in a country with a 10 percent tax rate.

1. Suppose Manufacturing would have excess capacity even with the demand from Distribution. Ignoring tax implications, what transfer price would you recommend Cascade Containers adopt?

2. What would be the total taxes Cascade Containers paid under the policy you recommend in requirement (1)?

3. Suppose Manufacturing has no excess capacity. Ignoring tax implications, what transfer price would you recommend Cascade Containers adopt?

4. What would be the total taxes Cascade Containers paid under the policy you recommend in requirement (3)?

1. Transfer price (excess capacity) ______

2. Total taxes paid (excess capacity) ______

3. Transfer price (NO excess capacity) ______

4. Total taxes paid (NO excess capacity) ______