Ch22 - CHAPTER 22 MANAGEMENT CONTROL SYSTEMS, TRANSFER...

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CHAPTER 22 MANAGEMENT CONTROL SYSTEMS, TRANSFER PRICING, AND MULTINATIONAL CONSIDERATIONS 22-19 Multinational transfer pricing, effect of alternative transfer-pricing methods, global income tax minimization. 1. This is a three-country, three-division transfer-pricing problem with three alternative transfer-pricing methods. Summary data in U.S. dollars are: China Plant Variable costs: 1,000 Yuan ÷ 8 Yuan per $ = $125 per subunit Fixed costs: 1,800 Yuan ÷ 8 Yuan per $ = $225 per subunit South Korea Plant Variable costs: 360,000 Won ÷ 1,200 Won per $ = $300 per unit Fixed costs: 480,000 Won ÷ 1,200 Won per $ = $400 per unit U.S. Plant Variable costs: = $100 per unit Fixed costs: = $200 per unit Market prices for private-label sale alternatives: China Plant: 3,600 Yuan ÷ 8 Yuan per $ = $450 per subunit South Korea Plant: 1,560,000 Won ÷ 1,200 Won per $ = $1,300 per unit The transfer prices under each method are: a. Market price China to South Korea = $450 per subunit South Korea to U.S. Plant = $1,300 per unit b. 200% of full costs China to South Korea 2.0 × ($125 + $225) = $700 per subunit South Korea to U.S. Plant 2.0 × ($700 + $300 + $400) = $2,800 per unit c. 300% of variable costs China to South Korea 3.0 × $125 = $375 per subunit South Korea to U.S. Plant 3.0 × ($375 + $300) = $2,025 per unit
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Method B Method C Internal Transfers at Market Price Internal Transfers at 200% of Full Costs Internal Transfers at 300% of Variable Costs 1. 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. South Korea Division Division revenue per unit Cost per unit: Transferred-in 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 20% Division net income per unit 3. United States Division Division revenue per unit Cost per unit: Transferred-in 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 30% Division net income per unit $ 450 125 225 350 100 40 $ 60 $1,300 450 300 400 1,150 150 30 $ 120 $3,200 1,300 100 200 1,600 1,600 480 $1,120 $ 700 125 225 350 350 140 $ 210 $2,800 700 300 400 1,400 1,400 280 $1,120 $3,200 2,800 100 200 3,100 100 30 $ 70 $ 375 125 225 350 25 10 $ 15 $2,025 375 300 400 1,075 950 190 $ 760 $3,200 2,025 100 200 2,325 875 262.5 $ 612.5 2. Division net income: Market Price 200% of Full Costs 300% of Variable Cost China Division South Korea Division U.S. Division User Friendly Computer, Inc. $ 60
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Ch22 - CHAPTER 22 MANAGEMENT CONTROL SYSTEMS, TRANSFER...

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