Chinglish Dirk (C). Chinglish Dick Company Hong Kong) exports razor blades to its wholy owned parent company Torrington Edge (Great Britain) Hong Kong tax rates are 16% and British tax Tales are 32%. The mackup was 15% and the sales volume was 1000 units Chinglish calculates its prost per container as follows (al values in British pounds Corporate management of Torrington Edge wishes to reposition profa in Hong Kong however, facing two constraints First, the final sales price in Great Britain must be E20 00G or less to remain competitive. Secondly, the British tax authorities--in working with Torrington Edge's cost accounting staff has established a maximum transfer price allowed (from Hong Kong of 17,800 Not to leave any potential tax repositioning opportunities unexplored, Torrington Edge wants to combine the components described above with a redistribution of overhead costs overhead costs could be reallocated between the two units, but still total 5,000 per unit and maintain a minimum of 1750 per unit in Hong Kong, prove that the optimal combination of markups is a 350% markup al Chinglish and an 4.64% markup in Torrington Edge. What is the impact of this repositioning on consolidated after tax profits and total tax payments? Calculate the profits of Chinglish Dirk and Torrington Edge and the consolidated results of both the markup at Chings was increased to 30% and the markup at Torrington was reduced to il 4 64% in the following table Round to the nearest British pound) Constructing Transfer Chinglish Dirk Torrington Edge Consolidated (Sales) Price per Unit (British pounds) (British pounds) (British pounds) Dired costs 10,000 Overhead 1.750 3.250 Total costs E 11.750 Desired markup Transfer price (sales price) E Income Statement Sales price Less total costs Taxable income Les taxes Profit after tax What is the impact of this repositioning on consolidated after tax profits and total tax paymenta? "By both increasing the markup in Hong Kong (and decreasing it in Great Britain)and allocating over head cool to Great Britain Torrington's consolidated profits improve once again by positioning profits (losses) in the low.tax (high tax) environments Note that this is an extreme result A35% markup in Hong Kong with only a 4 64% markup in Great Britain would probably in the end raise the attention of the British tax authorities The statement above is (Select from the drop-down menu Data table Consolidated (British pounds) Constructing Transfer (Sales) Price per Unit Direct costs Overhead Chinglish Dirk (British pounds) 10,000 4,000 14,000 2.100 16,100 Torrington Edge (British pounds) 16.100 1,000 17.100 2,565 Total costs Desired markup Transfer price (sales price) 19,665 Income Statement Sales price Less total costs Taxable income 16,100,000 (14,000,000) 2,100,000 (336,000) 1.764,000 19,665,000 (17,100,000) 2,565,000 (820 800) 1.744,200 Less taxes 1,156,800 3,508,200 Profit, after-tax
