Empire Ltd. has two divisions. Division C is in Canada where the income tax rate is 40%. Division K is in Korea where the income tax rate is 30%. Division C produces an intermediate product at a variable cost of $100 per unit and transfers the product to Division K where it is finished and sold for $500 per unit. Variable costs in Division K are $80 per unit. Fixed costs are $75,000 per year in Division C and $90,000 per year in Division K. Assume 1,000 units are produced and transferred annually and the minimum transfer price allowed by the Canadian tax authorities is the variable cost. Also, assume operating income in each country is equal to taxable income.

Required:

a. What transfer price should be set for Empire to minimize its total income taxes? Show your calculations.

b. If the Empire desires to minimize its total income taxes, calculate the amount of tax liability in each country

Answer rating: 100% (QA)

a To minimize total income taxes Empire Ltd should set the transfer price at the variable cost of pr... View the full answer