The Better Chair Company manufactures high-end chairs in alpha division in a country with a 20% income tax rate and transfers these chairs to beta division in a country with a 50% income tax. An import duty of 10% of the transfer price is paid on all imported products. The import duty is not deductible in computing taxable income. The fixed cost for a high-end chair is $1,000 and the variable cost is $2,000, which brings the full cost (i.e., total cost) for each chair to $3,000. They are sold by beta division for $4,000. The tax authorities in both countries allow firms to use either variable cost or full cost as the transfer price.

• Correctly account the appropriate information:
  • Synthesize the results of your calculations to recommend which transfer pricing method will result in a better overall outcome.
  • Explain how understanding and utilizing transfer pricing can impact managerial decision-making.

			Full Cost Method		Variable Cost Method
Alpha Division Taxes:
	Transfer Price	0		0
	Minus Cost	0		0
	Taxable Income	0		0
	Taxes in Division A	0		0
Beta Division Taxes:
	Sales Price	0		0
	Minus Transfer Price	0		0
	Taxable Income	0		0
	Income Taxes	0		0
	Import Duty	0		0
	Taxes in Division B	0		0
Total Taxes		0		0