The variable cost of Part X is $50 per unit and the full cost of the part is $80 per unit.The part is produced in Country Z and transferred to a plant in Country B.Country Z has a 30% income tax rate.Country B has a 50% income tax rate and an import duty equal to 10% of the price of the item.Part X can be transferred at full cost or variable cost.Assume Part X is transferred at full cost.By using full cost instead of variable cost for the transfer price,the income tax effect per unit in Country Z is ________.
A)a decrease in tax by $9 per unit
B)an increase in tax by $9 per unit
C)a decrease in tax by $24 per unit
D)an increase in tax by $24 per unit

Question

Quizplus · Accepted Answer

When Part X is transferred at full cost ($80) instead of variable cost ($50), the reported income in Country Z increases by $30 per unit. With a 30% tax rate, this results in an increase in tax by $9 per unit ($30 * 0.30).

The Variable Cost of Part X Is $50 Per Unit