Chinglish Dirk Company (Hong Kong) exports razor blades to its wholly owned parent company, Torrington Edge (Great Britain). Hong Kong tax rates are 16% and British tax rates are 32%. The markup was 15% and the sales volume was 1,500 units. Chinglish calculates its profit per container as follows (all values in British pounds):

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.Corporate management of Torrington Edge wishes to reposition profit in Hong Kong. It is, however, facing two constraints. First, the final sales price in Great Britain must be 20,000 or less to remain competitive. Secondly, the British tax

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working with Torrington Edge's cost accounting

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established a maximum transfer price allowed (from Hong Kong) of 17,800. Prove that the optimal combination of markups is a 25.0% markup at Chinglish and an 8.1% 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, if the markup at Chinglish was increased to 25.0% and the markup at Torrington was reduced to 8.1% in the following table:(Round to the nearest cent.)

Constructing Transfer		Chinglish Dirk		Torrington Edge		Consolidated
(Sales) Price per Unit		(British pounds)		(British pounds)		(British pounds)
Direct costs		10,000
Overhead		4,000		1,000
Total costs		14,000
Desired markup
Transfer price (sales price)

DATA:

Constructing Transfer

Chinglish Dirk

Torrington Edge

Consolidated

(Sales) Price per Unit

(British pounds)

(British pounds)

(British pounds)

Direct costs

10,000

16,100

Overhead

4,000

1,000

Total costs

14,000

17,100

Desired markup

2,100

2,565

Transfer price (sales price)

16,100

19,665

Income Statement

Sales price

24,150,000

29,497,500

Less total costs

(21,000,000)

(25,650,000)

Taxable income

3,150,000

3,847,500

Less taxes

(504,000)

(1,231,200)

1,735,200

Profit, after-tax

2,646,000

2,616,300

5,262,300