E22-20

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

The costs for the work done in each division for a single desktop computer are as follows:

China division:		Variable cost	=	900 yuan
		Fixed cost	=	1,500 yuan
South Korea division:		Variable cost	=	286,000 won
		Fixed cost	=	407,000 won
U.S. division		Variable cost	=	$200
		Fixed cost	=	$240
times	Chinese income tax rate on the China division's operating income: 40%
times	South Korean income tax rate on the South Korea division's operating income: 20%
times	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 $2,800.

Assume that the current foreign exchange rates are as follows:

6 yuan	=	$1 U.S.
1,100 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 People Able desktop computer to a Chinese manufacturer for 3,000 yuan. The South Korea division sells the comparable desktop computer to a South Korean distributor for 1,540,000 won

Requirements

1.	Calculate the after-tax operating income per unit earned by each division under the following transfer-pricing methods: (a) market price, (b) 150% of full cost, and (c) 300% 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 People Able Computer?