During the current year Ruby Company's foreign division A incurred production costs of $4 million for units that are transferred to its other foreign division, B. Costs in Division B, outside of the costs of production of the final product are $8 million. These are third-party costs. Sales revenue for the final product for Division B is $30 million. Other companies in the same country import a similar type of part as Division B at a cost of $7 million. Ruby has set its transfer price at $14 million, justifying this price because of the special controls it has on the operations in Division A as well as its special manufacturing method. The tax rate in the country where Division A is located is 40% while the tax rate for Division B's country is 70%.
Required:
1) What would Ruby's total tax liability for both divisions be if it used the $7 million transfer price?
2) What would the liability be if it used the $14 million transfer price?

Question

Quizplus · Accepted Answer

The Answer of During the current year Ruby Company's foreign division A incurred production costs of $4 million for units that are transferred to its other foreign division, B. Costs in Division B, outside of the costs of production of the final product are $8 million. These are third-party costs. Sales revenue for the final product for Division B is $30 million. Other companies in the same country import a similar type of part as Division B at a cost of $7 million. Ruby has set its transfer price at $14 million, justifying this price because of the special controls it has on the operations in Division A as well as its special manufacturing method. The tax rate in the country where Division A is located is 40% while the tax rate for Division B's country is 70%.
Required:
1) What would Ruby's total tax liability for both divisions be if it used the $7 million transfer price?
2) What would the liability be if it used the $14 million transfer price?

During the Current Year Ruby Company's Foreign Division a Incurred