Mintel Products, Inc. manufactures goods for sale in the United States and overseas. Finished goods are transferred from manufacturing firm to its wholly owned sales affiliate for overseas retail sale. Mintel's financial manager, Mr. Siu Pao, has decided that the firm's transfer pricing strategy should be reevaluated as part of a routine review of the operations of the sales affiliate.

Mr. Siu Pao has decided to explore both low and high markup policies for transfer pricing. He notes that the manufacturing affiliate has a tax rate of 16% and the sales affiliate has a 25% income tax rate, that the variable production cost of one unit is $1,400, and that the unit retail sales price charged by the sales affiliate to the final customer is $3000.

Mr. Siu has to decide whether to use a low mark up policy of $1800 per unit or a high mark up policy of $2300.

Consider Operating Expenses of $220 per unit on both low and high mark up strategies.

Furthermore, the sales affiliate is subject to an 8% duty on the imported goods.

Using the template below:

QUESTIONS:

1. Determine the NET INCOME per unit of the CONSOLIDATED COMPANY if they adopted the Low Mark Up Policy.

2. Determine the NET INCOME per unit of the CONSOLIDATED COMPANY if they adopted the High Mark Up Policy.

3. What price transfer strategy would you adopt?

4, What would the TOTAL NET GAIN DIFFERENCE be by adopting your strategy as opposed to the other strategy, assuming you sold 5000 units? (Please compu

TRANSFER PRICING POLICIES MANUFACTURING AFFILIATE SALES AFFILIATE CONSOLIDATED COMPANY LOW MARK UP SALES REVENUE COST OF GOOD SOLD IMPORT DUTY GROSS PROFIT OPERATING EXPENSES TAXABLE INCOME INCOME TAX NET INCOME HIGH MARK UP SALES REVENUE COST OF GOOD SOLD IMPORT DUTY GROSS PROFIT OPERATING EXPENSES TAXABLE INCOME INCOME TAX NET INCOME