Question: Jonah, Inc. has two operating divisions in a decentralized structure. Division X is located in the US and produces the Xwater, which is an input

Jonah, Inc. has two operating divisions in a decentralized structure. Division X is located in the US and produces the Xwater, which is an input to Division Y’s WhaleY. Division Y is located in the South of France. Division X uses idle capacity to produce Xwater. Xwater has a US domestic market price of $60. Its variable costs are $25 per unit. Jonah’s US tax rate is 40% of income. In addition to the transfer price for each Xwater received from Division X, Division Y also pays a shipping fee of $15 per unit ofXwater to get the Xwater from the US to France. The WhaleY costs an additional $10 to produce and sells for an equivalent of $115. Division Y could purchase Xwater from a Paris supplier for $50 per unit with no shipping cost. The company’s French tax rate is 70% of income. Assume French tax laws permit transferring at either variable cost or market price.

Assuming you have two choices – Variable and Market Price – what transfer price is economically optimal for Jonah, Inc.?

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