Division A transfers a profitable subassembly to Division B, where it is assembled into a final product. Division A is located in New Zealand, which has a high tax rate. Division B is located in Thailand, which has a low tax rate. Ideally, (1) which type of before tax income should each division report from the transfer and (2) what type of transfer price should be set for the subassembly?

Question

Quizplus · Accepted Answer

1. Division A should report a lower before-tax income to minimize its tax liability in New Zealand. Division B should report a higher before-tax income to take advantage of the lower tax rate in Thailand.
2. The transfer price should be set at a level that reflects the actual cost of producing the subassembly in Division A, plus a reasonable profit margin. This would ensure that Division A is compensated fairly for its contribution to the final product, while also ensuring that Division B can manufacture the final product at a competitive price. B is the correct answer because it suggests a transfer price that is based on the actual cost plus a reasonable profit margin, which is the most appropriate method of setting a transfer price.

Division a Transfers a Profitable Subassembly to Division B, Where