A New Project Is Projected to Yield $Million Annually in After-Tax

question 5

Multiple Choice

A new project is projected to yield $million annually in after-tax profit, based on a local corporate profit tax rate of 40%. However, this profit figure depends on the use of a transfer price of $30 per unit on a component bought from the parent. If the project requires 100,000 units of this component annually, the impact on project profitability and on parent profitability of a boost in the transfer price to $35 will be _______ and _______, respectively. The parent's marginal tax rate is 34% and the incremental tax on subsidiary remittances to the parent is -3%.

• A) -$500,000, +$500,000
• B) -$300,000, +$330,000
• C) -$300,000, +$321,000
• D) +$500,000, -$500,000

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Definitions:

Competitive Firm

A company operating in a market where it has to compete with other firms for consumers, and has no power to set the price of its products, leading to market-driven pricing strategies.

Monopolistically Competitive Industry

An industry characterized by many firms offering products or services that are similar, but not perfect substitutes, leading to competitive yet differentiated marketplaces.

Nonprice Competition

Strategies used by companies to attract customers through style, service, or location rather than through lower prices.

Products

Goods or services offered by businesses to meet consumer needs and wants.