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Question 3 (30 marks) Brazil Group harvests, processes and roasts coffee beans. The group has two divisions: Division X is located in Country X, it harvest and processes coffee beans. The processed coffee beans are sold to Division Y and external customers. Division Y is located in Country Y. It roasts processed coffee beans and then sells them to external customers. The budget information for the next is as follows: Division X Capacity 1000 tonnes External demand for processed coffee beans 780 tonnes, Market price $11,500 per tonne Demand from Division Y 600 tonnes Variable costs $7,000 per tonne Annual fixed costs of X $1,500,000 4 Division Y Sales of roasted coffee beans 500 tonnes Market price $22,000 per tonne Demand from Division X 600 tonnes The production of 1 tonne of roasted coffee beans requires an input of 1.2 tonnes of processed coffee beans. Variable costs $2,000 per tonne of input Annual fixed costs of Y $1,000,000 Current transfer pricing policy of the Group Division X must satisfy the demand from Division Y for processed coffee beans before selling any to the external customers. - The transfer price for the processed coffee beans is variable cost plus 15%. Assume the two divisions and the group uses the same currency. Taxation rate on profit: Country X: 40%; Country Y: 20% Required: (a) Under the current transfer pricing system, prepare a profit statement showing the profit after tax of each divisions and the company as a whole. Your profit statements should show sales and costs split into external sales and internal transfers where appropriate. (10 marks) (b) Discuss the tax consequences of Brazil Group's current transfer pricing policy. (6 marks) (c) If the head office changed its policy to state that the transfer price must be made at variable cost plus opportunity cost. Produce statements that show the profit after tax that would be earned by each of the two divisions and the company as a whole. (10 marks) (d) Refer to your answer (c), briefly comment on the revised transfer pricing policy. (4 marks)