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Green Light Trading is headquartered in the U.S. and its manufacturing facility is based in a foreign country. Green Light Trading sells toaster ovens at $25 per unit to customers in the U.S. and incurs unit selling expenses at $8 per unit. Green Light Trading sells 2.4 million units (Quantity) of toaster ovens per year. Its R&D expense is about $6.0 million per year and the amount of corporate expenses is $2 million per year. Green Light Trading, Co. currently only has manufacturing functions based in a foreign country (a subsidiary) while its sales, R&D, and headquarter functions are all based in the U.S. The foreign subsidiary's total manufacturing cost per unit (COGS) is $4.0 and the cost of shipping (Shipping) the products from the foreign country to the U.S. is $0.75 per unit (recorded as the selling expenses of the foreign subsidiary). At the moment the U.S. parent company purchases finished products from the foreign subsidiary at a mark-up of one dollar per unit. The shipping cost from the foreign country to the U.S. is added to the purchase price paid by the U.S. and the price paid by the U.S. (the transfer price) is $6.75 ($4.0 + $0.75 +$2.0 = $6.75). The foreign subsidiary's local general and administrative (Local Admin) expenses are $1.3 million per year. The corporate tax rate in the U.S. is 25% and the corporate tax rate in the foreign subsidiary is lower than the U.S. corporate tax rate. Assume that you are an employee of Green Light Trading, Co. and you work for the tax director. Determine the transfer price, effective tax rates, gross margin, net profit margin, and pretax return on sales of the U.S. parent, the foreign subsidiary, and the consolidated level in the following scenarlos: [Complete the Excel worksheet below by filling out the unknowns.] 1. Base case - The U.S. parent pays a $20 mark-up (10%) 2. Change the transfer price to the foreign subsidiary's COGS (exclude shipping) plus 100% COGS, i.e., transfer price is 2*COGS per unit + shipping cost per unit (15%) 3. Change the transfer price to allow the foreign subsidiary to have 50% pre-tax return on sales (15%) Hint: the new transfer price (TP) can be determined by solving the following equation: • [(TP-COGS-Shipping)xQuantity - Local Admin ]/(TP Quantity) = 50%, solve for TP 4. The foreign subsidiary does half of the R&D work and incurs R&D expenses of $3.0 million ($6.0 million*50%). As a result, the foreign subsidiary is able to charge a $10 mark-up per unit. Although U.S. parent's R&D expense is reduced by $3.0 million initially, the parent company incurs additional $200,000 R&D expense due to the overseeing activities needed (U.S. R&D is $6.0 million - $3.0 million + $200,000 = $3.2 million.) (15%) 5. U.S. parent manufactures domestically. In this scenario, the foreign subsidiary is dissolved. The U.S. cost of goods sold is estimated to be $10 per unit. In addition, the U.S. parent is able to reduce its headquarter expenses by $500,000. Selling expense and R&D expense are the same as in the base case. (15%) 6. Green Light Trading has two general managers whose bonuses may be affected depending on the scenario: the sales manager who is based in the U.S. and whose bonus is based on the level of gross margin; and the manufacturing manager who is based in the foreign country and whose bonus is based on the pre-tax return on sales. Assume that these two managers both aim to maximize their bonuses. Discuss which scenario (1 to 5 above) that you think will maximize Green Light Trading's shareholder values, which scenario (1 to 5 above) that you expect each manager would prefer, and what are your suggestions on the necessary changes to the performance targets of each manager that would induce them to buy in the scenario that you suggest in Ⓒ? (20%) Green Light Trading is headquartered in the U.S. and its manufacturing facility is based in a foreign country. Green Light Trading sells toaster ovens at $25 per unit to customers in the U.S. and incurs unit selling expenses at $8 per unit. Green Light Trading sells 2.4 million units (Quantity) of toaster ovens per year. Its R&D expense is about $6.0 million per year and the amount of corporate expenses is $2 million per year. Green Light Trading, Co. currently only has manufacturing functions based in a foreign country (a subsidiary) while its sales, R&D, and headquarter functions are all based in the U.S. The foreign subsidiary's total manufacturing cost per unit (COGS) is $4.0 and the cost of shipping (Shipping) the products from the foreign country to the U.S. is $0.75 per unit (recorded as the selling expenses of the foreign subsidiary). At the moment the U.S. parent company purchases finished products from the foreign subsidiary at a mark-up of one dollar per unit. The shipping cost from the foreign country to the U.S. is added to the purchase price paid by the U.S. and the price paid by the U.S. (the transfer price) is $6.75 ($4.0 + $0.75 +$2.0 = $6.75). The foreign subsidiary's local general and administrative (Local Admin) expenses are $1.3 million per year. The corporate tax rate in the U.S. is 25% and the corporate tax rate in the foreign subsidiary is lower than the U.S. corporate tax rate. Assume that you are an employee of Green Light Trading, Co. and you work for the tax director. Determine the transfer price, effective tax rates, gross margin, net profit margin, and pretax return on sales of the U.S. parent, the foreign subsidiary, and the consolidated level in the following scenarlos: [Complete the Excel worksheet below by filling out the unknowns.] 1. Base case - The U.S. parent pays a $20 mark-up (10%) 2. Change the transfer price to the foreign subsidiary's COGS (exclude shipping) plus 100% COGS, i.e., transfer price is 2*COGS per unit + shipping cost per unit (15%) 3. Change the transfer price to allow the foreign subsidiary to have 50% pre-tax return on sales (15%) Hint: the new transfer price (TP) can be determined by solving the following equation: • [(TP-COGS-Shipping)xQuantity - Local Admin ]/(TP Quantity) = 50%, solve for TP 4. The foreign subsidiary does half of the R&D work and incurs R&D expenses of $3.0 million ($6.0 million*50%). As a result, the foreign subsidiary is able to charge a $10 mark-up per unit. Although U.S. parent's R&D expense is reduced by $3.0 million initially, the parent company incurs additional $200,000 R&D expense due to the overseeing activities needed (U.S. R&D is $6.0 million - $3.0 million + $200,000 = $3.2 million.) (15%) 5. U.S. parent manufactures domestically. In this scenario, the foreign subsidiary is dissolved. The U.S. cost of goods sold is estimated to be $10 per unit. In addition, the U.S. parent is able to reduce its headquarter expenses by $500,000. Selling expense and R&D expense are the same as in the base case. (15%) 6. Green Light Trading has two general managers whose bonuses may be affected depending on the scenario: the sales manager who is based in the U.S. and whose bonus is based on the level of gross margin; and the manufacturing manager who is based in the foreign country and whose bonus is based on the pre-tax return on sales. Assume that these two managers both aim to maximize their bonuses. Discuss which scenario (1 to 5 above) that you think will maximize Green Light Trading's shareholder values, which scenario (1 to 5 above) that you expect each manager would prefer, and what are your suggestions on the necessary changes to the performance targets of each manager that would induce them to buy in the scenario that you suggest in Ⓒ? (20%)
Expert Answer:
Answer rating: 100% (QA)
To answer the questions we need to calculate several financial ratios for each scenario We can use the following formulas Gross Margin Revenue COGS Selling Expenses Revenue Net Profit Margin Net Incom... View the full answer
Related Book For
Understanding Business Statistics
ISBN: 978-1118145258
1st edition
Authors: Stacey Jones, Tim Bergquist, Ned Freed
Posted Date:
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