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Required: (a) Calculate the annual pre-tax operating profit, in Australia dollars(AUD) of each division under the following transfer-pricing methods: (i) Full cost + 200% (ii)
Required: (a) Calculate the annual pre-tax operating profit, in Australia dollars(AUD) of each division under the following transfer-pricing methods: (i) Full cost + 200% (ii) Market price (9 marks) (b) Calculate the after-tax operating profit, in AUD for each division under the transfer-pricing methods as stated in part (a) above. (Note: Income taxes are not included in the calculation of cost-based transfer price and CHICHu Diamonds Lid does not pay Australia Income Tax on income already taxed in Hong Kong) (2 Marks) (c) If the two division managers are compensated based on after-tax division operating profit, which transfer-pricing method will each prefer? Which transfer-pricing method will CHICHu Ltd adopt if the Board of Directors' objective is to maximize the company's total after-tax operating profit? (2 marks) (Total: 13 marks)
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