Week 5 Problems .docx - P 5-2 Phipps Electronics Solution...

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P 5-2: Phipps Electronics Solution: Transfer pricing methods Full cost Variable cost Low country taxes: Transfer price $1000 $700 -Cost (1000) (1000) Taxable income 0 (300) Income Taxes (of refund) (30%) 0 ($90) High country taxes: Sales price $1200 $1200 -Transfer price (1000) (700) Taxable income $200 $500 Income Taxes (40%) $80 $200 Import Duty (15% x Transfer price) 150 105 Taxes in high country $230 $305 Total taxes $230 $215 Assuming Phipps has positive taxable income in Low Country against which to offset the loss of transferring the boards at variable cost, and then the variable cost transfer pricing method minimizes the combined tax liability. P 5-15: Warm Boots Solution: Quantity Price Sale Value (Quantity x Price) Total Cost Operating income (Sale – Cost) 20 300 6000 645.00 5355.00 21 290 6090 672.30 5417.70 22 280 6160 700.20 5459.80 23 270 6210
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