GB Pharmaceuticals produces and sells a single drug, XY-5. The company is organized into three divisions: Manufacturing, Packaging, and Distribution. Manufacturing, located in country A, manufactures the drug producing a single-dose capsule. The variable cost of a capsule is $18. The fixed costs of Manufacturing is $10 million and Manufacturing produces 1 million capsules annually. Packaging is located in country B. Packaging takes the pills that are sent by Manufacturing in bulk and packages them in bottles containing 10 capsules each. The variable costs of packaging are $48 per bottle. The pills from Manufacturing are transferred at average (variable plus fixed) costs. Fixed costs in packaging are $4 million annually. Distribution, like Manufacturing, is located in country A. Distribution takes the bottles prepared by Packaging and sells them to distributors in country A. The variable costs of Distribution are $58 per bottle. Fixed costs in Distribution are $3 million annually. The pill produced by GB Pharmaceuticals is a generic drug with many competitors. The market value before distribution costs is determined to be $480. Distribution Division sells bottles to its customers for $610 per bottle. The tax rate in country A is 40 percent and 15 percent in country B. Required: a. The company decides that for tax purposes, it will use the market value of the pills (before distribution costs) for the transfer price between Packaging and Distribution. What is the total tax GB Pharmaceuticals will pay in income tax to the two countries? b. The tax authorities in country A object and argue that this drug is not that similar. Therefore, the transfer price should be the total cost (variable plus fixed) of Packaging. If that transfer price is used, what is the total tax GB Pharmaceuticals will pay in income tax to the two countries? Complete this question by entering your answers in the tabs below. Required A Required B The company decides that for tax purposes, it will use the market value of the pills (before distribution costs) for the transfer price between Packaging and Distribution. What is the total tax GB Pharmaceuticals will pay in income tax to the two countries? (Enter your answers in thousands of dollars.) Packaging Division Distribution Division Total revenue Total costs Income taxes Total taxes thousands Complete this question by entering your answers in the tabs below. Required A Required B The tax authorities in country A object and argue that this drug is not that similar. Therefore, the transfer price should be the total cost (variable plus fixed) of Packaging. If that transfer price is used, what is the total tax GB Pharmaceuticals will pay in income tax to the two countries? (Enter your answers in thousands of dollars.) Packaging Division Distribution Division Total revenue Total costs Income taxes Total taxes thousands
