Suppose that the U.S. division could sell as many broadband routers as it makes at $ 450 per unit in the U.S. market, net of all marketing and distribution costs.

In Exercise 22-23, The Questron Company manufactures telecommunications equipment at its plant in Scranton, Pennsylvania. The company has marketing divisions throughout the world. A Questron marketing division in Hamburg, Germany, imports 100,000 broadband routers from the United States. The following information is available:

U.S. income tax rate on the U.S. division’s operating income ...... 35%

German income tax rate on the German division’s operating income ... 40%

German import duty ......................... 15%

Variable manufacturing cost per router .................$ 275

Full manufacturing cost per router ...................$ 400

Selling price (net of marketing and distribution costs) in Germany ....$ 575

Suppose the United States and German tax authorities only allow transfer prices that are between the full manufacturing cost per unit of $ 400 and a market price of $ 475, based on comparable imports into Germany. The German import duty is charged on the price at which the product is transferred into Germany. Any import duty paid to the German authorities is a deductible expense for calculating German income taxes.

Required

1. From the viewpoint of the Questron Company as a whole, would after-tax operating income be maximized if it sold the 100,000 routers in the United States or in Germany? Show your computations.

2. Suppose division managers act autonomously to maximize their division’s after-tax operating income. Will the transfer price calculated in requirement 2 in Exercise 22-23 result in the U.S. division manager taking the actions determined to be optimal in requirement 1 of this exercise? Explain.

3. What is the minimum transfer price that the U.S. division manager would agree to? Does this transfer price result in the Questron Company as a whole paying more import duty and taxes than the answer to requirement 2 in Exercise 22-23? If so, by how much?