Required: (a) Calculate the increase in Pinder Ltds after-tax profit if the Illinois division sells 2,000 units in the U.S. for US$600 and the Austrian division sells 2,000 units of the AV23 equivalent in Austria.

(b) Pinder Head office wants the two divisions to trade with each other. Calculate the after-tax operating income earned by the U.S. division and Austrian division if they transferred 2,000 units of product AV23 at either the highest or the lowest price allowed by the tax authorities. Explain what transfer price, complying with the rules, would be most profitable for the company as a whole.

(c) If divisional managers acted autonomously to maximize their own divisions after-tax income, discuss the likely range within which the transfer price will lie, given the restrictions imposed by the tax authorities.

(d) Briefly discuss how companies trading internationally can maintain divisional autonomy and maximize profit. Relate your answer to the circumstances in the question.

Pinder Ltd has manufacturing divisions in the U.S. It also has marketing divisions worldwide which sell Pinder Ltd products and similar products for other manufacturers. The manufacturing division in Illinois produces one product, the AV23 for which the following cost and revenue information is available: U.S. tax rate on U.S. divisions' operating income 40% Variable manufacturing cost of product AV23 US$350 Full manufacturing cost of product AV23 US$500 Normal Market price in U.S. US$650 The Illinois division, in order to fill capacity, is discussing with a US customer the regular sale of 2,000 units of product Av23 at a discounted price of US$600 per unit. One of Pinder Ltd's marketing divisions is in Austria. It currently buys a product similar to AV23, from a local supplier for US$650* and sells it for US$750 The following information relates to Pinder Ltd trading in Austria: Austrian tax rate on Austrian division's operating income 30% Austrian import duty (based on import price) 5% Selling price in Austria US$750* *All prices in Austria quoted at their US$ equivalent The U.S. and Austrian tax authorities only allow transfer prices that are between the full manufacturing cost per unit and the U.S. market price of US$650. The import duty paid to the Austrian authorities is a deductible expense in calculating Austrian tax due. Pinder Ltd has manufacturing divisions in the U.S. It also has marketing divisions worldwide which sell Pinder Ltd products and similar products for other manufacturers. The manufacturing division in Illinois produces one product, the AV23 for which the following cost and revenue information is available: U.S. tax rate on U.S. divisions' operating income 40% Variable manufacturing cost of product AV23 US$350 Full manufacturing cost of product AV23 US$500 Normal Market price in U.S. US$650 The Illinois division, in order to fill capacity, is discussing with a US customer the regular sale of 2,000 units of product Av23 at a discounted price of US$600 per unit. One of Pinder Ltd's marketing divisions is in Austria. It currently buys a product similar to AV23, from a local supplier for US$650* and sells it for US$750 The following information relates to Pinder Ltd trading in Austria: Austrian tax rate on Austrian division's operating income 30% Austrian import duty (based on import price) 5% Selling price in Austria US$750* *All prices in Austria quoted at their US$ equivalent The U.S. and Austrian tax authorities only allow transfer prices that are between the full manufacturing cost per unit and the U.S. market price of US$650. The import duty paid to the Austrian authorities is a deductible expense in calculating Austrian tax due