value 3.63 points Problem 15-43 Transfer Prices and Tax Regulations: Ethical Iss
ID: 2520868 • Letter: V
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value 3.63 points Problem 15-43 Transfer Prices and Tax Regulations: Ethical Issues (LO 15-4) Gage Corporation has two operating divisions in a semiautonomous organizational structure. Adams Division, located in the United States, produces a specialized electrical component that is an input to Bute Division, located in the south of England. Adams uses idle capacity to produce the component, which has a domestic market price of $14. Its variable costs are $4 per unit. Gage's U.S. tax rate is 40 percent of income. In addition to the transfer price for each component received from Adams, Bute pays a $2 per unit shipping fee. The component becomes a part of its assembled product, which costs an additional $2 to produce and sells for an equivalent of $27. Bute could purchase the component from a Manchester (England) supplier for $11 per unit. Gage's English tax rate is 70 percent of income. Assume that English tax laws permit transferring at either variable cost or market price.Explanation / Answer
At Transfer price of $4 Adams Particulars Amount Selling Price/unit 4 Less:- Variable Cost 4 Contribution/unit 0 Bute Particulars Amount Selling Price/unit 27 Less:- Goods from adams 4 Less:- Shipping 2 Less:- Assembling 2 Contribution/unit before Tax 19 Less:- Tax@70% 13.3 Contribution/unit After Tax 5.7 At Transfer price of $14 Adams Particulars Amount Selling Price/unit 14 Less:- Variable Cost 4 Contribution/unit Before Tax 10 Less:- Tax@40% 4 Contribution/unit After Tax 6 Bute Particulars Amount Selling Price/unit 27 Less:- Goods from adams 14 Less:- Shipping 2 Less:- Assembling 2 Contribution/unit before Tax 9 Less:- Tax@70% 6.3 Contribution/unit After Tax 2.7 At Transfer price of $4 Profit per Unit (Adams) 0 Profit per Unit (Bute) 5.7 At Transfer price of $14 Profit per Unit (Adams) 6 Profit per Unit (Bute) 2.7
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