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Question 1 (20 points) Mochi, a division of CVS Food Corporation, is located in Japan. Its effective income tax rate is 30%. Another division of

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Question 1 (20 points) Mochi, a division of CVS Food Corporation, is located in Japan. Its effective income tax rate is 30%. Another division of CVS Food Coporation, Kiwi, is located in New Zealand, where the income tax rate is 40%. Kiwi manufactures an intermediate product for Mochi called KWMC. It takes 1 unit of K WMC to produce 1 unit of the final product of Mochi. Kiwi operates at capacity and makes 15,000 units of KWMC for Mochi each period, at a variable cost of $28 per unit. Assume that there are no outside customers for KWMC. Because the KWMC must be shipped from New Zealand to Japan, it costs Kiwi an additional $4 per unit to ship the KWMC to Mochi. There are no direct fixed costs for KWMC. A product similar to KWMC that Mochi could use as a substitute is available in Japan for $38.50 per unit. Required: 1. What is the minimum and maximum transfer price that would be acceptable to Mochi and Kiwi for KWMC? (5 points) 2. What transfer price would minimize income taxes for CVS Food Corporation as a whole? Would Mochi and Kiwi want to be evaluated on operating income using this transfer price? (7 points) 3. Suppose CVS uses the transfer price from requirement 2 and each division is evaluated on its own after-tax division operating income. Now suppose Kiwi has an opportunity to sell KWMC to an outside customer for $30 each. Kiwi will not incur shipping costs because the customer is nearby and offers to pay for shipping. If Kiwi accepts the special order, Mochi will have to buy the substitute product in Japan at $38.50 per unit and there will be no internal transaction between Kiwi and Mochi. The final product of Moch is sold at $60 per unit. Find out the per-unit change (i.e., increase/decreaseochange and its changing amount in dollars if any) in after-tax operating income for CVS Corporation as a whole after accepting the special offer and giving up the current transfer pricing. (8 points)

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