Computer, Inc., with headquarters in San Francisco, manufactures and sells a desktop computer.

Office Friendly has three divisions each of which is located in a different country. Each division is run as a profit center. Information on each division follows:

Requirements:

1.	Calculate the after-tax operating income per unit earned by each division under the following transfer-pricing methods: (a) market price, (b) 200% of full cost, and (c) 350% of variable cost. (Income taxes are not included in the computation of the cost-based transfer prices.)
2.	Which transfer-pricing method(s) will maximize the after-tax operating income per unit of Office Friendly Computer?

A Data Table The costs for the work done in each division for a single desktop computer are as follows: China division: South Korea division: Variable cost = 1,080 yuan Fixed cost = 2,070 yuan Variable cost = 370,000 won Fixed cost = 500,000 won Variable cost = $170 Fixed cost = $280 U.S. division Chinese income tax rate on the China division's operating income: 40% South Korean income tax rate on the South Korea division's operating income: 20% U.S. income tax rate on the U.S. division's operating income: 40% Each desktop computer is sold to retail outlets in the United States for $4,200. Assume that the current foreign exchange rates are as follows: 9 yuan = $1 U.S. 1,000 won = $1 U.S. Both the China and the South Korea divisions sell part of their production under a private label. The China division sells the comparable memory/keyboard package used in each Office Friendly desktop computer to a Chinese manufacturer for 3,600 yuan. The South Korea division sells the comparable desktop computer to a South Korean distributor for 1,480,000 won. Print Done