Lumber which is the action preferred by the company

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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. 3. Transfer price at market price = $200 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 $200 100 $100 $275 200 125 $ (50 ) 22-2
Because the Raw Lumber Division will be indifferent between selling the lumber in raw or finished form, it would be willing to maximize 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 not further processing raw lumber and this is preferred by the company as a whole. Thus, transfer at market price will result in division actions that are also in the best interest of the company as a whole.
22-20 (35 min.) 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 as follows: China Plant Variable costs: 900 Yuan ÷ 9 Yuan per $ = $100 per subunit Fixed costs: 1,980 Yuan ÷ 9 Yuan per $ = $220 per subunit South Korea Plant Variable costs: 350,000 Won ÷ 1,000 Won per $ = $350 per unit Fixed costs: 470,000 Won ÷ 1,000 Won per $ = $470 per unit U.S. Plant Variable costs: = $125 per unit Fixed costs: = $325 per unit Market prices for private-label sale alternatives: China Plant: 4,500 Yuan ÷ 9 Yuan per $ = $500 per subunit South Korea Plant: 1,340,000 Won ÷ 1,000 Won per $ = $1,340 per unit The transfer prices under each method are: a. Market price
c. 350% of variable costs
22-2
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

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