Question
The Beaver Company manufactures chainsaws at its plant in Sandusky, Ohio. The company has marketing divisions throughout the world. A Beaver marketing division in Lille,
The Beaver Company manufactures chainsaws at its plant in Sandusky, Ohio. The company has marketing divisions throughout the world. A Beaver marketing division in Lille, France, imports 250,000 chainsaws annually from the United States. The following information is available:
U.S income tax rate on the U.S. division's operating income 40%
French income tax rate on the French division's operating income 45%
French import duty 20%
Variable manufacturing cost per chainsaw $110
Full manufacturing cost per chainsaw $185
Selling price (net of marketing and distribution costs) in France $300
Suppose the United States and French tax authorities only allow transfer prices that are between the full manufacturing cost per unit of $185 and a market price of $250, based on comparable imports into France. The French import duty is charged on the price at which the product is transferred into France. Any import duty paid to the French authorities is a deductible expense for calculating French income taxes.
1. | Calculate the after-tax operating income earned by the United States and French divisions from transferring 250,000 chainsaws (a) at full manufacturing cost per unit and (b) at market price of comparable imports. (Income taxes are not included in the computation of the cost-based transfer prices.) |
2. | Which transfer price should the Beaver Company select to minimize the total of company import duties and income taxes? Remember that the transfer price must be between the full manufacturing cost per unit of $185 and the market price of $250 of comparable imports into France. Explain your reasoning. |
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