Company GLM produces a product that consists of two parts. The first part is produced by a subsidiary in country A
at $5 per unit. The second part is being produced by another subsidiary in country B at $7 per unit. They are assembled by another one of GLM’s subsidiaries in country C at a cost of $5 per unit. GLM is considering selling the product in country C at $25 per unit, or selling it to country D at the same price ($25 per unit). Shipping the product to D will cost $1 per unit. The tax rates in these four countries are: A = 15% B = 20% C = 10% D = 0% (no tax) GLM’s management has to answer two questions: (1) What transfer prices should be used by subsidiaries A and B when they charge subsidiary C? (Note: they cannot report a loss, so they need to break even at the least) (2) Should the product be sold in country C or D? Show all your calculation. GLM is trying to maximize its aggregate after tax profits.
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