Reference no: EM132665117

Automotive Bearing Systems Inc. (ABS), with headquarters in Aurora, ON, manufactures bearing systems that are sold to various car assembler plants. ABS has three divisions, each of which is located in a different country:

a. Argentinean Division-has the foundry and produces the different parts.

b. Brazilian Division-assembles the bearings, using the parts produced in the Argentinean Division.

c. Canadian Division-packages and distributes on a just in time schedule to all Canadian car assemblers plants of Honda and Ford.

Each division is run as a profit centre. The costs for the work done in each division that are associated with a box of bearings are as follows:

Argentine Division

Variable costs = 150 Pesos

Fixed costs = 270 Pesos

Brazilian Division

Variable costs = 90 Reales

Fixed costs = 150 Reales

Canadian Division

Variable costs = 25 CAD

Fixed costs = 50 CAD

Argentinean income tax rate on Argentine Division's operating income 35%

Brazilian income tax rate on Brazilian Division's operating income 25%

Canadian income tax rate on Canadian Division's operating income 30%

Each box of bearings is sold to car assemblers in Canada for $700. Assume that the current foreign exchange rates are:

1.67 Real = $1 Cdn.

3 Pesos = $1 Cdn.

Both the Argentinean and Brazilian Divisions sell part of their production under a private label. The Argentinean Division sells the bearing parts to an Argentine bearing manufacturer for 600 pesos. The Brazilian division sells the finished bearings to a Brazilian car assembler 585 Reales.

Required

Problem 1. Solve the after-tax operating income per unit earned by each division under each of the following transfer pricing methods: (a) market price, (b) 150% of full costs, and (c) 300% of variable costs. (Income taxes are not included in the computation of the cost-based transfer prices.)

Problem 2. Which transfer pricing method(s) will maximize the net income of ABS, Inc.?