Example 3. A multinational firm has two divisions. The Mining Division is in South Africa and mines raw diamonds. The Processing Division is in the US and polishes raw diamonds for use in making cutting tools. It takes 2 pounds of raw diamonds to make 1 pound of polished diamonds. The Mining Division mines 8,000 pounds of raw diamonds per year. It can sell these in South Africa for 3,600 ZAR (South African Rand) per pound. The exchange rate is 6 ZAR = $1 US. Assume all of the Mining Division's raw diamonds are sold to the US Processing Division and that the US Division does not purchase raw diamonds from any other firm. Here is more information about each Division Mining Division: VC/pound of raw diamonds 600 ZAR FC/pound of raw diamonds 1,200 ZAR Income Tax Rate Processing Division: VC/pound of polished diamonds $220 FC/pound of polished diamonds $850 Market selling price for polished diamonds $3,500/pound Income Tax Rate 40% The firm may use a transfer price of (a) market price or (b) 250% of full costs. For each transfer price, calculate (1) the transfer price, (2) each division's operating income, and (3) the total amount of income tax paid by the firm. (Income taxes are not included in the costs used to set the cost-based transfer price and the firm does not pay US income taxes on income already taxed in South Africa.) 25%