Covington Company (a manufacturer) and Howard Company (a retailer)are both foreign subsidiaries of Parent Company. Covington produces widgets at a cost of $20 each and sells them both to Howard and to unrelated customers. Howard purchases widgets from Covington and from unrelated suppliers and sells them for $100 each. The income tax rate in the countries Covington and Howard are located are 30% and 15%, respectively.  
Calculate the after-tax profit for Parent Company, if Covington and Howard have negotiated a transfer price of $50 and if the Parent Company establishes a discretionary transfer price of $90. From a performance evaluation standpoint, which transfer price would Howard prefer? From a cost benefit standpoint, which method would the Parent Company prefer?

Answer rating: 100% (QA)

a For 50 transfer price After tax profit 635 For 90 transfer pr... View the full answer