200 of full costs china to south 220 640 per subunit

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200% of full costs China to South Korea 2.0 ($100 + $220) = $640 per subunit South Korea to U.S. Plant 2.0 ($640 + $350 + $470) = $2,920 per unit c. 350% of variable costs China to South Korea 3.5 $100 = $350 per subunit South Korea to U.S. Plant 3.5 ($350 + $350) = $2,450 per unit 22-6
Method A Method B Method C Internal Transfers at Market Price Internal Transfers at 200% of Full Costs Internal Transfers at 350% 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 $ 500 100 220 320 180 72 $ 108 $1,340 500 350 470 1,320 20 4 $ 16 $3,800 1,340 125 325 1,790 2,010 603 $1,407 $ 640 100 220 320 320 128 $ 192 $2,920 640 350 470 1,460 1,460 292 $1,168 $3,800 2,920 125 325 3,370 430 129 $ 301 $ 350 100 220 320 30 12 $ 18 $2,450 350 350 470 1,170 1,280 256 $1,024 $3,800 2,450 125 325 2,900 900 270 $ 630 2. Division net income: Market Price 200% of Full Costs 350% of Variable Costs China Division South Korea Division U.S. Division Tech Friendly Computer, Inc. $ 108 16 1,407 $1,531 $ 192 1,168 301 $1,661 $ 18 1,024 630 $1,672 Tech Friendly will maximize its net income by using the third method, 350% of variable costs, as the transfer price. This is because this method sources relatively little income in China, the country with the highest income tax rate. 22-7
22-20 (30 min.) Transfer-pricing methods, goal congruence. 1. Alternative 1: Sell as raw lumber for $200 per 100 board feet: Revenue $200 Variable costs 100 Contribution margin $100 per 100 board feet Alternative 2: Sell as finished lumber for $275 per 100 board feet: Revenue $275 Variable costs: Raw lumber $100 Finished lumber 125 225 Contribution margin $ 50 per 100 board feet British Columbia Lumber will maximize its total contribution margin by selling lumber in its raw form. An alternative approach is to examine the incremental revenues and incremental costs in the Finished Lumber Division: Incremental revenues, $275 – $200 $ 75 Incremental costs 125 Incremental loss $ (50 ) per 100 board feet 2. Transfer price at 110% of variable costs: = $100 + ($100 0.10) = $110 per 100 board feet Sell as Raw Lumber Sell as Finished Lumber Raw Lumber Division Division revenues Division variable costs Division operating income Finished Lumber Division Division revenues Transferred-in costs Division variable costs Division operating income $200 100 $100 $ 0 $ 0 $110 100 $ 10 $275 110 125 $ 40 The Raw Lumber Division will maximize reported division operating income by selling raw lumber, which is the action preferred by the company as a whole. The Finished Lumber Division will maximize division operating income by selling finished lumber, which is contrary to the action preferred by the company as a whole.

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