SEMO Inchas a Division Located in Spain and Another in the the U.S.The

question 94

Essay

SEMO Inc.has a division located in Spain and another in the U.S.The Spanish division produces a part needed for the product made by the U.S.division.There is substantial excess capacity in the Spanish division.The tax rate of the Spanish division is 35% and U.S.division tax rate is 30%.The part sells externally for $75 and the Spanish division's manufacturing costs are: $$\begin{array} { | l r | } \hline \text { Direct material } & \$ 32 \\\hline \text { Direct labor } & 12 \\\hline \text { Variable overhead } & 6 \\\hline \text { Fixed overhead } & 19 \\\hline\end{array}$$
Required:
1)What would be the lowest acceptable transfer price for the Spanish division?
2)What would be the highest acceptable transfer price for the U.S.division?
3)What would be the transfer price that would be the best for SEMO Inc.and why?

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Definitions:

Leisure

Time available for ease and relaxation where no work is done.

Consumption Goods

Goods that are intended and consumed by individuals or households to satisfy their immediate wants and needs.

Perfect Complements

Goods that are often used together in fixed proportions, where the utility of one item increases with the usage of the other.

Wage Rate

The amount of money paid to an employee per unit of time, often per hour or day.