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.