A Company Has a Plant in a High Tax Jurisdiction
A company has a plant in a high tax jurisdiction that produces products for a facility in a low tax jurisdiction.Suggest a strategy, including transfer prices, which will result in the lowest tax for the overall corporation.
Hendricks Ltd.of Calgary manufactures and sells computers.The Manufacturing Division is located in China and transfers 75% of its output to the Assembly Division in the Philippines.The balance of the product is sold in the local market at 2,100 yuan/unit.The Philippines division sells 20% of its output in the local market at 31,500 pesos/unit, with the balance shipped to Calgary.The Calgary operation packages the units and sells the final product at $1,900 Canadian per unit.The following budget data are available: Tax rates are 45% in China, 20% in the Philippines and 40% in Canada.Income taxes are not included in the calculation of cost-based transfer prices.Assume that Hendricks does not pay Canadian tax on amounts already taxed in foreign jurisdictions.Take each calculation to 2 decimal places.Required: The company has determined that it may transfer units at 250% of variable cost or at market and comply with all existing tax legislation.Which transfer pricing method should the company pursue? Support your recommendation with appropriate calculations.
Clark Industries Ltd.manufactures monochromators that are used in a variety of applications.The Monochromator Division (M Division)sells its monochromators both internally and externally.It is operating at 80% of its 250,000 unit capacity and internal sales account for approximately 20% of its current sales volume.Internally the monochromators are transferred into the Aerospace Division (A Division)at a transfer price of $11,250 each.Variable production costs are the same for internal and external sales.The income statement for the M Division is presented below: The A Division uses one component in the production of its final product that sells for $75,000/unit.Other variable costs in the A Division are 40% of sales.and fixed costs per unit at its current capacity of 40,000 units are $17,250.The Aerospace Division is operating at its full capacity of 40,000 units and is evaluating whether it should invest to increase capacity.The investment would cost $900,000,000 and would have a useful life of 3 years.The equipment could be sold for $800,000 at the end of its useful life.For tax purposes it would be sold on January 1 of year 4.The machine would be used to manufacture a variation of its current product with the same transfer price.This new product would sell for $68,000 per unit.The variable cost ratio will be 45% of the selling price.The additional capacity of the new machine would be 14,000 units.It would qualify for a 30% CCA rate and the company would continue to have assets in the pool.Required: a.Evaluate the current transfer pricing policy from the standpoint of each division manager as well as the company as a whole. b.Using net present value (NPV)analysis, would the A Division manager want to invest in the new equipment if the required rate of return is 12% and the tax rate is 25%? c.If the investment is evaluated from a corporate perspective using NPV analysis and the 12% discount rate, does the decision change? Explain.