Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 63

Transfer Pricing; Ethics Target Manufacturing, Inc., is a multinational firm with sales and manufacturing units in 15 countries. One of its manufacturing units, in country X, sells its product to a retail unit in country Y for $200,000. The unit in Country X has manufacturing costs of $100,000 for these products. The retail unit in country Y sells the product to final customers for $300,000. Target is considering adjusting its transfer prices to reduce overall corporate tax liability.

Required

1. Assume that both country X and country Y have corporate income tax rates of 40 percent and that no special tax treaties or benefits apply to Target. What would be the effect on Target’s total tax burden if the manufacturing unit raises its price from $200,000 to $240,000?

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2. What would be the effect on Target’s total taxes if the manufacturing unit raised its price from $200,000 to $240,000 and the tax rate in country X is 20 percent and in country Y is 40 percent?

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3. Comment on the ethical issues you observe, if any, in this case.

Step 1 of 4

Transfer pricing is the price calculation approach where the good is been sold from one unit to another unit of same firm. There are different methods to calculate transfer pricing like variable cost method, full cost method, market price method, etc.