Compute overall company profitability per unit

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Reference no: EM132782824

Alpha Communications, Inc., which produces telecommunications equipment in the United States, has a very strong local market for its circuit board. The variable production cost is P130, and the company can sell its entire supply domestically for $170. The U.S. tax rate is 40 percent.

Alternatively, Alpha can ship the circuit board to its division in Germany, to be used in a product that the German division will distribute throughout Europe. Information about the German product and the division's operating environment follows.

Selling Price of final product: P360

Shipping fees to import circuit board: P20

Labor, overhead, and additional material costs of final product: P115

Import duties levied on circuit board (to be paid by the German division): 10% of transfer price

German tax rate: 60%

Assume that U.S. and German tax authorities allow a transfer price for the circuit board set at either U.S. variable manufacturing cost or the U.S. market price. Alpha's management is in the process of exploring which transfer price is better for the firm as a whole.

Required:

Question 1. Compute overall company profitability per unit if all are transferred and U.S. variable manufacturing cost is used as the transfer price. Show separate calculations for the U.S. operation and the German division.

Question 2. Repeat requirement (1), assuming the se of the U.S. market price as the transfer price. Which of the two transfer prices is better for the firm?

Question 3. Assume the German division can obtain the circuit board in Germany for P155.

a. If you were the head of the German division, would you rather do business with your U.S. division or buy the circuit board locally? Why?

b. Rather than proceed with the transfer, is it in the best interest of Alpha to sell its goods domestically and allow the German division to acquire the circuit board in Germany? Why? Show computations to support your answer.

Question 4. Generally speaking, when tax rates differ between countries, what strategy should a company use in setting its transfer prices?

Reference no: EM132782824

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