Minnesota Medical Instruments produces a variety of medical products at its plant in Minneapolis. The company has sales divisions worldwide. One of these sales divisions is located in Stockholm, Sweden. Assume that the U.S. income tax rate is 30%, the Swedish rate is 65%, and a 5% import duty is imposed on medical supplies brought into Sweden.
One product produced in Minneapolis and shipped to Sweden is a heart defibrillator. The variable cost of production is $200 per unit, and the fully allocated cost is $350 per unit.
1. Suppose the Swedish and U.S. governments allow either the variable or fully allocated cost to be used as a transfer price. Which price should Minnesota Medical Instruments choose to minimize the total of income taxes and import duties? Compute the amount the company saves if it uses your suggested transfer price instead of the alternative. Assume import duties are not deductible for tax purposes.
2. Suppose the Swedish parliament passed a law decreasing the income tax rate to 40% and increasing the duty on heart monitors to 15%. Repeat number 1, using these new facts.