Question
Northfield Manufacturing has two operating divisions in a semiautonomous organizational structure. Americas Division, based in the United States, produces a specialized memory chip that is
Northfield Manufacturing has two operating divisions in a semiautonomous organizational structure. Americas Division, based in the United States, produces a specialized memory chip that is an input to Asia Division, based in Japan. Americas Division uses idle capacity to produce the component, which has a domestic market price of $87. Its variable costs are $40 per unit. Northfield's U.S. tax rate is 25 percent of income. In addition to the transfer price for each component received from Americas, Asia Division pays an $33 per unit shipping fee. The chip becomes a part of its assembled product, which costs an additional $27 to produce and sells for an equivalent of $188. Asia could purchase the component from an Asian supplier for $75 per unit. Northfields tax rate in Japan is 30 percent of income. Assume that Japanese tax laws permit transferring at either variable cost or market price. Required: a-1. What are the respective profits after tax for both the Americas Division and Asia Division of Northfield Manufacturing if the transfer price is $40? a-2. What are the respective profits after tax for both the Americas Division and Asia Division of Northfield Manufacturing if the transfer price is $87? a-3. What transfer price is economically optimal for Northfield Manufacturing?
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