People Friendly Computer Inc., with headquarters in Nepean, Ontario, manufactures and sells a premium desktop computer system. People Friendly has three divisions, each of which is located in a different country. 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: Required 1. Calculate the after-tax operating income per unit earned by each division under the following transfer-pricing methods: (a) market price, (b) 150% of full cost, and (c) 350% 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 People Friendly Computer Inc.? |(Click the icon to view the data.) Requirement 1. Calculate the after-tax operating income per unit earned by each division under the following transfer-pricing methods: (a) market price, (b) 150% of full cost, and (c) 350% of variable cost. (Income taxes are not included in the computation of the cost-based transfer prices.) Begin with calculating the after-tax operating income for the China division under each method. Then complete the table for South Korea and Canada. (Convert all foreign currencies to Cdn. dollars. Round all amounts to the nearest cent.) Method A Method B Method C China division Division revenue per unit Cost per unit: Division variable cost per unit IN Division fixed cost per unit Total division cost per unit Division operating income per unit Income tax at 38% Division net income per unit South Korea division LOTTI Division revenue per unit Cost per unit: Transferred-in cost per unit Division variable cost per unit Division fixed cost per unit Total division cost per unit Division operating income per unit Income tax at 20% Division net income per unit Canada division LINN Division revenue per unit Cost per unit: Transferred-in cost per unit Division variable cost per unit Division fixed cost per unit Total division cost per unit Total division cost per unit Division operating income per unit Income tax at 30% Division net income per unit Requirement 2. Which transfer-pricing method(s) will maximize the after-tax operating income per unit of People Friendly Computer Inc.? Begin by calculating the total after-tax operating income of People Friendly Computer Inc. under each method. (Enter amounts to the nearest cent.) Method A Method B Method C Total after-tax operating income will maximize the after-tax operating income per unit. i Data Table China division Variable cost = 1,000 yuan = 1,800 yuan Fixed cost South Korea division Variable cost = 360,000 won Fixed cost 480,000 won Canada division Variable cost = 175 CAD Fixed cost = 190 CAD Chinese income tax rate on China division's operating income 38% South Korean income tax rate on South Korea division's operating income 20% Canadian income tax rate on Canada division's operating income 30% Each desktop computer package is sold to retail outlets in Canada for $3,200. Assume that the current foreign exchange rates are as follows: $1 Cdn. 1,200 won $1 Cdn. Both the China and the South Korea divisions sell part of their production under a private label. The China division sells the comparable memory/keyboard package used in each People 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. 8 yuan =
