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.