Santos Shipping Lines (SSL) operates a fleet of container ships in international trade between Brazil and Ireland. All of the shipping income (that is, that related to SSLs ships) is deemed to be earned in Brazil. SSL also owns a dock facility in Ireland that services SSLs fleet. Income from the dock facility is deemed to be earned in Ireland. SSLs income deemed attributable to Brazil is taxed at a 34 percent rate. Its income attributable to Ireland is taxed at a 12.5 percent rate. Last year, the dock facility had operating revenues of $18 million, excluding services performed for SSLs ships. SSLs shipping revenues for last year were $79 million.

Operating costs of the dock facility totaled $22 million last year and operating costs for the shipping operation, before deduction of dock facility costs, totaled $48 million. No similar dock facilities in Ireland are available to SSL.

However, a facility in the United Kingdom (UK) would have charged SSL an estimated $17 million for the services that SSLs Ireland dock provided to its ships. SSL management noted that had the services been provided in Brazil, the costs for the year would have totaled $23 million. SSL argued to the Brazilian tax officials that the appropriate transfer price is the price that would have been charged in Brazil. Brazilian tax officials determined that the UK price is the appropriate one.

Required:

Calculate the total revenue, total costs, and income taxes for both the Cargo Division and the Maintenance Division and the total taxes for the company as a whole using the United Kingdom basis.

Calculate the total revenue, total costs, and income taxes for both the Cargo Division and the Maintenance Division and the total taxes for the company as a whole using the Brazil basis.

What is the difference in tax costs to SSL between the alternate transfer prices for dock services, that is, its price in Brazil versus that in the UK?

Wager Enterprises has four operating divisions: Tours, Hotels, Concerts, and Ticket Services. Each division is a separate segment for financial reporting purposes. Revenues and costs related to outside transactions were as follows for the past year (dollars in thousands):

	Tours	Hotels	Concerts	Ticket Services
Revenues	$ 8,910	$ 19,670	$ 7,190	$ 2,630
Costs	5,750	12,630	5,350	2,470

6. Tours Division participates in a "frequent explorer" program with Hotels Division. During the past year, Tours reported that it traded lodging award coupons for tours that had a retail value of $864,000, assuming that the tours were redeemed at full prices. Concerts Division offered 20 percent discounts to Wager's tour customers and hotel guests. These discounts to tour customers were estimated to have a retail value of $254,000. Wager's hotel guests redeemed $574,000 in concert discount coupons. The Hotels Division also provided rooms for employees of the Tours Division (drivers and guides). The value of the rooms for the year was $2.4 million.

Ticket Services Division sold tickets on behalf of Tours Division valued at $334,000 for the year. This service for intracompany lodging was valued at $174,000. It also sold concert tickets for Concerts; tickets for intracompany concert admission were valued at $94,000.

While preparing all of these data for financial statement presentation, Tour Divisions controller stated that the value of the hotel rooms used for Tours Division employees should be based on their differential and opportunity costs, not on the full price. This argument was based on the fact that the hotel rooms are usually those that would otherwise be empty or sold at a discount. If the differential and opportunity costs were used for this transfer price, the value would be $474,000 instead of $2.4 million. Hotel Divisions controller made a similar argument concerning the concert discount coupons. If the differential cost basis were used for the concert coupons, the transfer price would be $94,000 instead of $574,000.

Wager Enterprises reports assets in each division as follows (dollars in thousands):

Tours	$ 30,940
Hotels	76,540
Concerts	25,820
Ticket Services	5,340

Required:

a. Using the retail values for transfer pricing for segment reporting purposes, what are the operating profits for each Wager Enterprises division?

b. What are the operating profits for each Wager Enterprises division using the differential cost basis for pricing transfers?

c-1. Rank each division by ROI using the transfer pricing method in requirement (a).

c-2. Rank each division by ROI using the transfer pricing method in requirement (b).