WMBA 6050 Week 4 Assignment Transfer Data

Transfer Pricing

The next area you have been asked to address is regarding the decision to transfer the new lounge chair from its production division in Country X to the company’s retail division in Country Y. The management team wants to understand which transfer pricing method should be used: full cost or variable cost. In Doc Sharing, your Instructor will provide you with a scenario for The Better Chair Company to use for this part of the Assignment.

The Better Chair Company manufactures high-end chairs in alpha division in a country with a 35% income tax rate and transfers these chairs to beta division in a country with a 40% income tax. An import duty of 10% of the transfer price is paid on all imported products. The import duty is not deductible in computing taxable income. The fixed cost for a high-end chair is $200 and the variable cost is $650, which brings the full cost (i.e., total cost) for each chair to $850. They are sold by beta division for $1100. The tax authorities in both countries allow firms to use either variable cost or full cost as the transfer price.

To complete this part, address the following:

Using the Week 4 Part 2 Assignment Template and the data provided by your Instructor in the Doc Sharing area, calculate the full-cost transfer pricing method and the variable-cost transfer pricing method.

Note: In addition to submitting your work in Excel, include your calculations within your report by copying and pasting the information from Excel.

• Synthesize the results of your calculations to recommend which transfer pricing method will result in a better overall outcome.
• Explain how understanding and utilizing transfer pricing can impact managerial decision making.

Related: (Solution) Performance Report and the Balanced Scorecard

Solution

Solution: Transfer Pricing for The Better Chair Company

We need to choose between full-cost and variable-cost transfer pricing methods for transferring high-end chairs from the Alpha division in Country X (35% tax rate) to the Beta division in Country Y (40% tax rate). The import duty is 10% of the transfer price and is non-deductible. The fixed cost per chair is $200, the variable cost is $650, making the total cost (full cost) per chair $850. These chairs are sold by Beta for $1,100.

Step-by-Step Calculation for Both Methods

1. Full-Cost Transfer Pricing Method:
   • Transfer Price: $850 (total cost, which includes $200 fixed and $650 variable cost).
   • Sales Price: $1,100 (price at which Beta division sells the chair).
   • Taxable Income Calculation:
     • Sales Price – Transfer Price = $1,100 – $850 = $250 taxable income.
     • Income Tax: Tax rate in Country Y is 40%, so the income tax is 40% of $250 = $100.
   • Import Duty: Import duty is 10% of the transfer price, so 10% of $850 = $85.
   • Net Income:
     • Net Income = Sales Price – Transfer Price – Income Tax – Import Duty.
     • Net Income = $1,100 – $850 – $100 – $85 = $65 per chair.

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