Gage Corporation has two operating divisions in a semiautonomous organizational structure. Adams Division, located in the United States, produces a specialized electrical component that is an input to Bute Division, located in the south of England. Adams uses idle capacity to produce the component, which has a domestic market price of $10. Its variable costs are $5 per unit. Gages U.S. tax rate is 40 percent of income.

In addition to the transfer price for each component received from Adams, Bute pays a $2 per unit shipping fee. The component becomes a part of its assembled product, which costs an additional $3 to produce and sells for an equivalent of $24. Bute could purchase the component from a Manchester (England) supplier for $10 per unit. Gages English tax rate is 60 percent of income. Assume that English tax laws permit transferring at either variable cost or market price.

Required:

a-1. What are the respective profits after tax for both the Adams Division and Bute Division of Gage if the transfer price is $5.

a-2. What are the respective profits after tax for both the Adams Division and Bute Division of Gage if the transfer price is $10.

a-3. What transfer price is economically optimal for Gage Corporation?