Subsidiary X,located in a Country with a 25% Corporate Income

question 49

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 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:

Break-even Chart

A graphical representation showing the point at which total costs and total revenues are equal, indicating no net loss or gain.

Fixed Costs

Fixed costs are expenses that do not change with the level of production or sales, such as rent, salaries, and insurance.

Variable Costs

Costs that change in proportion to the level of production or business activity.

Profit

The financial gain made in a transaction or operation, calculated as the difference between revenue and expenses.