Multinational transfer pricing, global tax minimization The Mornay Company manufactures telecommunications equipment at its plant in Toledo, Ohio. The company has marketing divisions throughout the world. A Mornay marketing division in Vienna, Austria, imports 10,000 units of Product 4A36 from the United States. The following information is available:

U.S. income tax rate on the U.S. division’s operating income 35%

Austrian income tax rate on the Austrian division’s operating income 40%

Austrian import duty 15%

Variable manufacturing cost per unit of Product 4A36 $ 550

Full manufacturing cost per unit of Product 4A36 $ 800

Selling price (net of marketing and distribution costs) in Austria $1,150

Suppose the United States and Austrian tax authorities only allow transfer prices that are between the full manufacturing cost per unit of $800 and a market price of $950, based on comparable imports into Austria. The Austrian import duty is charged on the price at which the product is transferred into Austria. Any import duty paid to the Austrian authorities is a deductible expense for calculating Austrian income taxes due.

Required

1. Calculate the after-tax operating income earned by the United States and Austrian divisions from transferring 10,000 units of Product 4A36 (a) at full manufacturing cost per unit and (b) at market price of comparable imports. (Income taxes are not included in the computation of the cost-based transfer prices.)

2. Which transfer price should the Mornay Company select to minimize the total of company import duties and income taxes? Remember that the transfer price must be between the full manufacturing cost per unit of $800 and the market price of $950 of comparable imports into Austria. Explain your reasoning.