QUESTION 5 Jules Jones is a regional manager of SubMacron, an alternative energy rm developing, manufacturing, and exploiting photovoltaic technologies. Jules is in charge of the European unit of SubMacron. His unit's sole activity is to manufacture and sell Wafers. The unit manufactures 270,000 Wafers and is operating at 90 percent of theoretical capacity. The European unit currently sells these Wafers to outside customers at 100 per Wafer. The European unit incurs 25 in variable manufacturing costs per Wafer and 5 in variable selling costs when selling to outside buyers. The unit also incurs 11,500,000 in total xed costs. The European unit could produce at up to 96 percent of its theoretical capacity without disruptions to current production or the need of additional investment. Jules does not plan (nor have the resources) to make any investments in additional capacity in the foreseeable future. Charlene Cobb, another regional manager of SubMacron, is in charge of the North American unit. Charlene has asked Jules to supply 50,000 Wafers from the European unit to the North American unit. The North American unit manufactures and sells Modules, and Wafers are a key input. The North American unit is currently operating at 50 percent of practical capacity due to a low supply of Wafers. The unit utilizes 2 Wafers to manufacture 1 Module. At the North American unit, the cost to manufacture and sell a Module currently consists of 40 for parts in addition to the cost of the Wafers, 30 for other variable costs per unit, and it also incurs 3,000,000 in xed costs. The Modules are sold for 240 each. To achieve her desired percentage mark up, Charlene does not want to pay more than 65 per wafer. The production of additional Modules would not alter the variable costs per unit and would not require any changes to xed costs (the North American unit would be able to utilize currently idle capacity). Both managers are rewarded based on their own prots. REQUIRED: (a) What is the theoretical capacity level in the European unit? [2 marks] (b) What is the minimum transfer price Jules Jones could accept without hurting his performance? Will he accept Charlene's offer of 65? [6 marks] (0) What is the maximum transfer price Charlene Cobb can afford to pay without hurting her performance? Should she stick to her 65 price limit? [4 marks] For the next questions ((d) and (en also consider the impact of taxation. The corporate tax rate in the European subsidiary is 30%, and the corporate tax rate in the North American unit is 35%. However, while the European operation has been protable, the North American unit has been losing money for years and now has such large tax carry forwards that it does not expect to pay any taxes for the foreseeable future. The accountant expects that the European tax authorities will not accept a transfer price below full cost, and that the North American tax authorities will not accept a transfer price that would result in a negative net realizable value (sales price minus variable costs (including the transfer price)) of the Modules. (d) What is the range of the transfer prices allowed by the tax authorities? Within this (9) (1') range, what is the transfer price that maximizes SubMacron's overall after tax prot? Will Jules accept this transfer price without headquarter interference, and why? Will Charlene, and why? [8 marks] Cognizant that a tax motivated transfer price might distort incentives for internal sales the board is considering evaluating Jules only on the level of prots generated by his external sales, rather than his total prots. Will this resolve any potential incentive problems resulting from tax effects? [3 marks] Briey discuss how rms generally set transfer prices and what considerations are involved in that decision. Mention cases as appropriate. [2 marks]