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

question 36

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. What is advantage of this decision?

• A) Net income for Subsidiary X will increase by $30 per unit.
• B) Net income for the corporation as a whole will increase by $30 per unit.
• C) Net income for the corporation as a whole will increase by $3 per unit.
• D) Net income for Subsidiary Y will decrease by $30 per unit.

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Definitions:

Thyroid-stimulating Hormone

A pituitary hormone that regulates the production of hormones by the thyroid gland.

Adrenal Medulla

The inner part of the adrenal glands that produces adrenaline and noradrenaline, hormones involved in the body's stress response.

Pineal Gland

A small endocrine gland in the brain that produces the hormone melatonin, which regulates sleep patterns.

Prolactin

A hormone produced by the anterior pituitary gland that stimulates milk production in mammals.