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Speedy Grow Inc., based in Clinton, lowa, sells high-end fertilizers. Speedy Grow has two divisions: - North Italy mining division, which mines potash in northern
Speedy Grow Inc., based in Clinton, lowa, sells high-end fertilizers. Speedy Grow has two divisions: - North Italy mining division, which mines potash in northern Italy U.S. processing division, which uses potash in manufacturing top-grade fertilizer Requirements 1. Compute the annual pretax operating income, in U.S. dollars, of each division under the following transfer-pricing methods: (a) 150\% of full cost and (b) market price. 2. Compute the after-tax operating income, in U.S. dollars, for each division under the transfer-pricing methods in requirement 1. (Income taxes are not included in the computation of cost-based transfer price, and Speedy Grow does not pay U.S. income tax on income already taxed in Italy.) 50% : It takes 2 tons of raw potash to produce 1 ton of top-grade 3. If the two division managers are compensated based on after-tax division operating income, which transfer-pricing method will each prefer? Which transfer-pricing method will maximize the total after-tax operating income of Speedy Grow? Euro = $1 U.S. The following information is known about the two divisions: (Click the icon to view the information.) 4. In addition to tax minimization, what other factors might Speedy Grow consider in choosing a transfer-pricing method? Requirement 1. Compute the annual pretax operating income, in U.S. dollars, of each division under the following transfer-pricing methods: (a) 150% of full cost and (b) market price. 150% of Full Cost Market Price North Italy Mining division Division revenue Cost: Division variable cost Division fixed cost Total division cost Division operating income
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