A MNE produces mid-fi HD radios as follows. The high-tech components are produced in the US at
Question:
A MNE produces mid-fi HD radios as follows. The high-tech components are produced in the US at a cost of $30. These components are then sent to Malaysia where additional components are produced and the radios are assembled at cost of $20. The radios sell for $60. Your job as a junior analyst in the MNE’s finance department is to determine the transfer price of the US components. The tax rate on corporate income in the United States (federal and state) is 25% and 40% in Malaysia. You are asked to find the after-tax profit for each of the following cases. As always, your supervisor will expect you to show your work in full.
a. The US components are priced at $30.
b. The US components are priced at $35.
c. The US components are priced at $40.
d. You are also asked to make a recommendation based on your calculations. Which transfer price minimizes the firm’s tax bill and maximizes the firm’s after-tax profit? Briefly explain.
Expert Answer:
Answer Aftertax profit margin is the percentage of revenue remaining after all operating expenses in... View the full answer
