EXERCISE 1

A 3-country, 3-division transfer pricing. The China plant division sells a product to the South Korea Plant which sells to the US plant of the same company. The selling price of the US plant to final users is $ 3,800. Corporate taxes are 40% in China, 20% in South Korea, and 30% in the US. The intermediate product sold from the China plant is sold in the open market at $500 and the South Korea Product is sold, also in the open market, at $1,340.

1. Calculate transfer prices (TP) using the following three methods: using market prices, at 200% of full costs, and at 350% of variable costs.
2. Calculate the division and overall net income using the three methods.

Data: China

Variable cost/unit $100

Fixed cost/unit $220

South Korea

Variable cost/unit $350

Fixed cost/unit $470

US

Variable costs/units $125

Fixed costs/unit $325