Harper Ltd. is a Canadian company with a fully owned subsidiary in Poland. The Polish subsidiary produces a potato that is specially grown for perogies. A tonne of these special potatoes have a variable cost of 110 Euros and a full cost of 160 Euros. A similar potato product grown on Prince Edward Island (PEI) in Canada can be purchased on the open market for $430 per tonne, but Harper does not prefer these PEI potatoes because they are not as creamy as the Polish potatoes.

Every year Harper sells 10 million packages of perogies (each package weighs one kilogram) in the Canadian market and these retail for $2.80 per package. It takes 40,000 tonnes of potatoes to make 10 million packages of perogies. The Canadian division incurs additional processing costs of $1.00 per package to make and package the perogies.

Assume the minimum transfer price allowed by the Canadian tax authorities is 150% of the variable cost and the maximum transfer price allowed by the Canadian tax authorities is the market value of the raw product (potatoes). Also assume operating income in each country is equal to taxable income.

One Euro is worth $1.50 Canadian. The marginal tax rate in Canada is 12% and in Poland is 25%.

Required:

1.) What is the Net Income for the Polish Division and the Canadian Division of Harper Ltd. using the market value transfer price? Show the income statement for each division in proper form. (8 marks show your calculations for marks)

2.) What is the Net Income for the Polish Division and the Canadian Division of Harper Ltd. using the 150% of Variable Cost transfer price? Show the income statement for each division in proper form. (8 marks show your calculations for marks)

3) What transfer price should be set for Harper Ltd. to minimize its total income taxes and maximize profit? (2 marks show your calculations)

4.) What is the difference between the Net Income that Harper Ltd. would earn between the two transfer methods? (2 marks show your calculations)