Problem 15-48 (Static) Transfer Prices and Tax Regulations: Ethical Issues (LO 15-4) Gage Corporation has two operating

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Problem 15 48 Static Transfer Prices And Tax Regulations Ethical Issues Lo 15 4 Gage Corporation Has Two Operating 1 (41.51 KiB) Viewed 19 times

Problem 15-48 (Static) Transfer Prices and Tax Regulations: Ethical Issues (LO 15-4) Gage Corporation has two operating divisions in a semiautonomous organizational structure. Adams Division, located in the United States, produces a specialized electrical component that is an input to Bute Division, located in the south of England. Adams uses idle capacity to produce the component, which has a domestic market price of $12. Its variable costs are $5 per unit. Gage's U.S. tax rate is 40 percent of income. In addition to the transfer price for each component received from Adams, Bute pays a $3 per unit shipping fee. The component becomes a part of its assembled product, which costs an additional $2 to produce and sells for an equivalent of $23. Bute could purchase the component from a Manchester (England) supplier for $10 per unit. Gage's English tax rate is 70 percent of income. Assume that English tax laws permit transferring at either variable cost or market price. Required: a-1. What are the respective profits after tax for both the Adams Division and Bute Division of Gage if the transfer price is $5. a-2. What are the respective profits after tax for both the Adams Division and Bute Division of Gage if the transfer price is $12. a-3. What transfer price is economically optimal for Gage Corporation?