MULTINATIONAL TRANSFER PRICING, EFFECT OF ALTERNATIVE TRANSFER-PRICING METHODS, GLOBAL INCOME TAX MINIMIZATION. User Friendly Computer Inc., with headquarters in Nepean, Ontario, manufactures and sells a premium desktop computer system. User Friendly has three divisions, each of which is located in a different country:

LO 2

1. a. China to South Korea, $450 per subunit

China divisionmanufactures memory devices and keyboards.

China divisionVariable costs

=

1

,

000

yuan

Variable costs=1,000yuan

Fixed costs

=

1

,

800

yuan

Fixed costs=1,800yuan

South Korea divisionVariable costs

=

360

,

000

won

Variable costs=360,000won

Fixed costs

=

480

,

000

won

Fixed costs=480,000won

Canada divisionVariable costs

=

CA$100

Variable costs=CA$100

Fixed costs

=

CA$200

Fixed costs=CA$200

Chinese income tax rate on China division's operating income20%South Korean income tax rate on South Korea division's operating income20Canadian income tax rate on Canada division's operating income30

South Korea divisionassembles desktop computers using internally manufactured parts and memory devices and keyboards from the China division.

Canada divisionpackages and distributes desktop computer packages.

Each division is run as a profit centre. The costs for the work done in each division for a single desktop computer system are as follows:

1. Each desktop computer package is sold to retail outlets in Canada for $3,200. Assume that the current foreign exchange rates are:
2. 8
3. yuan
4. =
5. CA$1
6. 1
7. ,
8. 200
9. won
10. =
11. CA$1
12. 8yuan=CA$11,200won=CA$1
13. Both the China and South Korea divisions sell part of their production under a private label. The China division sells the comparable memory/keyboard package used in each User Friendly desktop computer to a Chinese manufacturer for 3,600 yuan. The South Korea division sells the comparable desktop computer package to a South Korean distributor for 1,560,000 won.

Required

1. Calculate the after-tax operating income per unit earned by each division under each of the following transfer-pricing methods: (a) market price, (b) 200% of full cost, and (c) 300% of variable cost. (Income taxes are not included in the computation of the cost-based transfer prices.)
2. Which transfer-pricing method(s) will maximize the after-tax operating income per unit of User Friendly Computer Inc.?