Comput Industries is a high-tech company in the United States with several subsidiaries, including Cancomput, which is located in Canada, and Heavencomput, which is located in another country with very favourable tax laws. Both subsidiaries are considered profit centres. Cancomput manufactures components used by Heavencomput and sells all its production to this subsidiary. The controller has established the transfer price at $135 per component, even though Cancomput can sell the same pieces on the external market for $175.
Instructions
(a) Briefly explain why Comput Industries is fixing a transfer price below the market price. What are the advantages for the company as a whole?
(b) Explain the consequences of the transfer-pricing policy on each subsidiary. Explain what change should be made to improve the situation.
(c) Briefly describe two other transfer-pricing methods that could be used in this situation.