Reference no: EM131672710

Question: Multinational transfer pricing, effect of alternative transfer-pricing methods, global income tax minimization. Tech Friendly Computer, Inc., with headquarters in San Francisco, manufactures and sells a desktop computer. Tech Friendly has three divisions, each of which is located in a different country:

a. China division-manufactures memory devices and keyboards

b. South Korea division-assembles desktop computers using locally manufactured parts, along with memory devices and keyboards from the China division

c. U.S. division-packages and distributes desktop computers Each division is run as a profit center. The costs for the work done in each division for a single desktop computer are as follows:

- Chinese income tax rate on the China division's operating income: 40%

- South Korean income tax rate on the South Korea division's operating income: 20%

- U.S. income tax rate on the U.S. division's operating income: 30% Each desktop computer is sold to retail outlets in the United States for $3,800. Assume that the current foreign exchange rates are as follows:

9 yuan = $1 U.S.

1,000 won = $1 U.S.

Both the China and the South Korea divisions sell part of their production under a private label. The China division sells the comparable memory/keyboard package used in each Tech Friendly desktop computer to a Chinese manufacturer for 4,500 yuan. The South Korea division sells the comparable desktop computer to a South Korean distributor for 1,340,000 won.

1. Calculate the after-tax operating income per unit earned by each division under the following transferpricing methods:

(a) market price,

(b) 200% of full cost, and

(c) 350% of variable cost. (Income taxes are not included in the computation of the cost-based transfer prices.)

2. Which transfer-pricing method(s) will maximize the after-tax operating income per unit of Tech Friendly Computer?