Express Grow Inc., based in Ankeny, Iowa, sells high-end fertilizers. Express Grow has two divisions: North Italy

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Express Grow Inc., based in Ankeny, Iowa, sells high-end fertilizers. Express Grow has two divisions:

North Italy mining division, which mines potash in northern Italy

U.S. processing division, which uses potash in manufacturing top-grade fertilizer

The processing division's yield is 50%: It takes 2 tons of raw potash to produce 1 ton of top-grade fertilizer. Although all of the mining division's output of 8,000 tons of potash is sent for processing in the United States, there is also an active market for potash in Italy. The foreign exchange rate is 0.80 Euro = $1 U.S. The following information is known about the two divisions:

Express Grow Inc., based in Ankeny, Iowa, sells high-end fertilizers.

Required
1. Compute the annual pretax operating income, in U.S. dollars, of each division under the following transfer-pricing methods: (a) 150% of full cost and (b) market price.
2. Compute the after-tax operating income, in U.S. dollars, for each division under the transfer-pricing methods in requirement 1. (Income taxes are not included in the computation of cost-based transfer price, and Express Grow does not pay U.S. income tax on income already taxed in Italy.)
3. If the two division managers are compensated based on after-tax division operating income, which transfer-pricing method will each prefer? Which transfer-pricing method will maximize the total after tax operating income of Express Grow?
4. In addition to tax minimization, what other factors might Express Grow consider in choosing a transfer pricing method?

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...
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Related Book For  book-img-for-question

Horngrens Cost Accounting A Managerial Emphasis

ISBN: 978-0134475585

16th edition

Authors: Srikant M. Datar, Madhav V. Rajan

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