User Friendly Computer, Inc., with headquarters in San Francisco, manufactures and sells a desktop computer. User Friendly has three divisions:

a. China divisionmanufactures memory devices and keyboards
b.	South Korea divisionassembles desktop computers using locally manufactured parts, along with memory devices and keyboards from the China Division
c.	U.S. divisionpackages and distributes desktop computers

Each of which is located in a different country. Each division is run as a profit center. Information on each division follows:

The costs for the work done in each division for a single desktop computer are as follows:

China division:	Variable cost	=	1,200 yuan
	Fixed cost	=	1,800 yuan
South Korea division:	Variable cost	=	340,000 won
	Fixed cost	=	490,000 won
U.S. division	Variable cost	=	$110
	Fixed cost	=	$190

	Chinese income tax rate on the China division's operating income: 40%
	South Korean income tax rate on the South Korea division's operating income: 20%
	U.S. income tax rate on the U.S. division's operating income: 30%

Each desktop computer is sold to retail outlets in the United States for $4,200.

Assume that the current foreign exchange rates are as follows:

8 yuan = $1 U.S.

1,000 won = $1 U.S.

Both the China and the South Korea divisions sell part of their production under a private label. The China division sells the comparable memory/keyboard package used in each User Friendly desktop computer to a Chinese manufacturer for 4,200 yuan. The South Korea division sells the comparable desktop computer to a South Korean distributor for 1,450,000 won.

Requirements

1.

Calculate the after-tax operating income per unit earned by each division under the following transfer-pricing methods:

(a) market price, (b) 200% of full cost, and (c) 400% of variable cost. (Income taxes are not included in the computation of the cost-based transfer prices.)

Begin with calculating the after-tax operating income for the China division under each method. Then complete the table for South Korea and the United States.

Method A	Method B	Method C
China division
Division revenue per unit
Cost per unit:
Division variable cost per unit
Division fixed cost per unit
Total division cost per unit
Division operating income per unit
Income tax at 40%
Division net income per unit

2.

Which transfer-pricing method(s) will maximize the after-tax operating income per unit of User Friendly Computer?