Dominion Ltd

question 141

Essay

Dominion Ltd.has two divisions.Division C is located in Canada where the income tax rate is 40%.Division I is located in Ireland where the income tax rate is 20%.Division C produces an intermediate product at a variable cost of $90 per unit and transfers the product to Division I where it is finished and sold for $400 per unit.Variable costs in Division I are $60 per unit.Fixed costs are $75,000 per year in Division C and $20,000 per year in Division I.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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