MODULE CASE 8

Giant Company has two subsidiaries Alpha and Omega. Both companies make identical computer printers Information about the two subsidiaries for 2009 is as follows:

ALPHA OMEGA

Location Brazil Chile

Sales Price (US dollars) $1000 $1000

Production cost per unit $700 $650

Production capacity 20000units 30000 units

Current production/sales 10000 units 20000 units

Tax rate 40% 40%

1) Determine the after tax profit of Alpha and Omega. How do you evaluate Alpha and Omega (cost, profit, or revenue center)

2) Giant Company has $40,000 in bonuses to distribute to the 2 divisions, how do you allocate the bonuses (note: you must distribute the entire $40,000)

In 2010 Giant purchases a third company called Gamma. Gamma is located in Costa Rica and sells computer printers, which it acquires from other manufacturers. Information about Gamma is as follows:

Sales price ($) $900

Purchase price of printers $820

Sales 9000 printers

Taxes 40%

To spur its economy Costa Rica has passed a tax change reducing their income tax rate to 10%. Giant is convinced that the both Brazil and Chilean governments will not object to any sales price that at least break even.

In 2010 Alpha and Omega will continue to have the same sales to their local customers

REQUIRED: FOR 2010

3)

HOW DO YOU SUPPLY GAMMA WITH PRINTERS?

WHAT TRANSFER PRICE DO YOU CHARGE?

HOW DO YOU EVALUATE ALPHA, GAMMA AND OMEGA (COST, REVENUE OR PROFIT CENTER)

YOU NOW HAVE $60,000 IN BONUSES TO DISTRIBUTE TO THE 3 COMPANIES, HOW DO YOU DO IT?

It is now 2013 and the Costa Rican tax break has expired so that all transactions involving Costa Rica are taxed at 40%. In 2013 the cost of making a printer in Brazil is now $680 while the cost of making a printer in Chile is $670. Alpha and Omega are still selling to their local customers at $1000 per printer. Costa Rica is now selling 9200 printers at $920

REQUIRED: FOR 2013

4)

HOW DO YOU SUPPLY GAMMA WITH PRINTERS?

WHAT TRANSFER PRICE TO YOU CHARGE?

HOW DO YOU EVALUATE ALPHA, GAMMA AND OMEGA (COST, REVENUE OR PROFIT CENTER)

YOU NOW HAVE $60,000 IN BONUSES TO DISTRIBUTE TO THE 3 COMPANIES, HOW DO YOU DO IT?

ANSWER 1-4 Questions***