Subsidiary X, Located in a Country with a 25% Corporate

question 27

Multiple Choice

Subsidiary X, located in a country with a 25% corporate income tax rate, and Subsidiary Y, located in a country with a 35% corporate income tax rate are part of a decentralized organization. They have been engaged in trade with one another using a negotiated transfer price of $50 per unit for sales by Subsidiary X to Subsidiary Y. Pipko, the parent company of both Subsidiary X and Subsidiary Y recently set a discretionary transfer price of $80 per unit for the transfers between X and Y. How will subsidiary managers in the decentralized organization view this decision by parent company management?

• A) They will embrace it whole-heartedly because corporate profits will increase.
• B) The manager of Subsidiary Y will be concerned about the decline in Subsidiary Y's profit and the effect this will have on his/her bonus.
• C) They won't mind because the intercompany transaction will still occur.
• D) They won't notice because all decisions in the decentralized organization are made by the parent.

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Definitions:

Superordinate

A term used to describe a higher-level or more general category in classification systems to which subcategories belong.

Subordinate

Lower in rank or position, often referring to an individual who is under the authority or control of another within an organizational or hierarchical structure.

Complex

A psychological term referring to a related group of emotionally significant ideas that cause distress or disturbance.

Classical View

In philosophy, the perspective that holds certain concepts or categories as absolute and universally applicable, often in contrast to more relativistic or subjective views.