Chinglish Dirk (C). Chinglish Dirk Company (Hong Kong) exports razor blades to its wholly owned parent company, Torringt

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Chinglish Dirk C Chinglish Dirk Company Hong Kong Exports Razor Blades To Its Wholly Owned Parent Company Torringt 1 (130.49 KiB) Viewed 38 times

Chinglish Dirk (C). Chinglish Dirk Company (Hong Kong) exports razor blades to its wholly owned parent company, Torrington Edge (Great Britain). Hong Kong tax rates are 17% and British tax rates are 30%. The markup was 15% and the sales volume was 1,000 units. Chinglish calculates its profit per container as follows (all values in British pounds): Corporate management of Torrington Edge wishes to reposition profit in Hong Kong. It is, however, facing two constraints. First, the final sales price in Great Britain must be £20,000 or less to remain competitive. Secondly, the British tax authorities in working with Torrington Edge's cost accounting staff—has established a maximum transfer price allowed (from Hong Kong) of £17,800. Not to leave any potential tax repositioning opportunities unexplored, Torrington Edge wants to combine the components described above with a redistribution of overhead costs. If overhead costs could be reallocated between the two units, but still total £5,000 per unit, and maintain a minimum of £1,750 per unit in Hong Kong, prove that the optimal combination of markups is a 35.0% markup at Chinglish and an 4.64% markup in Torrington Edge. What is the impact of this repositioning on consolidated after-tax profits and total tax payments?
Constructing Transfer Chinglish Dirk Consolidated Torrington Edge (British pounds) (Sales) Price per Unit (British pounds) (British pounds) Direct costs £ 10,000 £ 16,100 Overhead 4,000 1,000 Total costs £ 14,000 £ 17,100 2,100 2,565 Desired markup Transfer price (sales price) £ 16,100 £ 19,665 Income Statement Sales price £ 16,100,000 £ (14,000,000) 19,665,000 (17,100,000) Less total costs Taxable income £ 2,100,000 £ 2,565,000 Less taxes (357,000) (769,500) £ 1,126,500 Profit, after-tax £ 1,743,000 £ 1,795,500 £ 3,538,500
Calculate the profits of Chinglish Dirk and Torrington Edge, and the consolidated results of both, if the markup at Chinglish was increased to 35.0% and the markup at Torrington was reduced to 4.64% in the following table: (Round to the nearest British pound.) Constructing Transfer Chinglish Dirk Consolidated Torrington Edge (British pounds) (Sales) Price per Unit (British pounds) (British pounds) Direct costs £ 10,000 £ Overhead 1,750 3,250 Total costs £ 11,750 £ Desired markup Transfer price (sales price) £ £ Income Statement Sales price ܛܟ £ Less total costs Taxable income £ £ Less taxes £ Profit, after-tax £ £ £