Castor, a division of Gemini Corporation, is located in the United States. Its effective income tax rate
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1. What is the minimum and maximum transfer price that would be acceptable to Castor and Pollux for IP- 2013, and why?
2. What transfer price would minimize income taxes for Gemini Corporation as a whole? Would Pollux and Castor want to be evaluated on operating income using this transfer price?
3. Suppose Gemini uses the transfer price from requirement 2, and each division is evaluated on its own after- tax division operating income. Now suppose Pollux has an opportunity to sell 8,000 units of IP- 2013 to an outside customer for $ 62 each. Pollux will not incur shipping costs because the customer is nearby and offers to pay for shipping. Assume that if Pollux accepts the special order, Castor will have to buy 8,000 units of the substitute product in the United States at $ 77 per unit.
a. Will accepting the special order maximize after- tax operating income for Gemini Corporation as a whole?
b. Will Castor want Pollux to accept this special order? Why or why not?
c. Will Pollux want to accept this special order? Explain.
d. Suppose Gemini Corporation wants to operate in a decentralized manner. What transfer price should Gemini set for IP- 2013 so that each division acting in its own best interest takes actions for the special order that are in the best interests of Gemini Corporation as a whole?
Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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Related Book For
Managerial Accounting Decision Making and Motivating Performance
ISBN: 978-0137024872
1st edition
Authors: Srikant M. Datar, Madhav V. Rajan
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