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 Portugal and transferred to a plant in the United States.Portugal has a 10% income tax rate.The United States 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 Portugal is ________.
A) a decrease in tax by $3 per unit
B) an increase in tax by $3 per unit
C) a decrease in tax by $15 per unit
D) an increase in tax by $15 per unit

Question

Quizplus · Accepted Answer

If the part is transferred at full cost, then the transfer price will be $80 per unit. The income tax effect in Portugal is calculated on the profit, which is the full cost minus the variable cost. The profit per unit is $80 - $50 = $30. The income tax rate in Portugal is 10%, so the income tax per unit in Portugal is $30 x 10% = $3. Therefore, using full cost instead of variable cost for the transfer price will increase the income tax in Portugal by $3 per unit, making choice (B) the correct answer.

The Variable Cost of Part X Is $50 Per Unit