Empire Ltd

question 125

Essay

Empire Ltd.has two divisions.Division C is located in Canada where the income tax rate is 40%.Division K is located in Korea where the income tax rate is 30%.Division C produces an intermediate product at a variable cost of $100 per unit and transfers the product to Division K where it is finished and sold for $500 per unit.Variable costs in Division K are $80 per unit.Fixed costs are $75,000 per year in Division C and $90,000 per year in Division K.Assume 1,000 units are produced and transferred annually and the minimum transfer price allowed by the Canadian tax authorities is the variable cost.Also assume operating income in each country is equal to taxable income.Required:
a.What transfer price should be set for Empire to minimize its total income taxes? Show your calculations.
b.If Empire desires to minimize its total income taxes, calculate the amount of tax liability in each country.

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Definitions:

Merchandising Company

A company that purchases and sells tangible inventory to customers without changing its form.

Service Company

A business entity that provides intangible products or services to consumers or other businesses.

FOB Shipping Point

A term used in shipping that indicates that the buyer is responsible for the cost and risk of transport as soon as the goods are loaded onto the shipping vehicle.

Freight Costs

Expenses associated with transporting goods from one place to another, which could include shipping, trucking, and other logistical expenses.