P $5-2$: Phipps Electronics

Phipps manufactures circuit boards in Division Low in a country with a $30$ percent income tax rate and transfers them to Division High in a country with a $40$ percent income tax. An import duty of $15$ percent of the transfer price is paid on all imported products. The import duty is not deductible in computing taxable income. The circuit boards' full cost is $$1,000$ and variable cost is $$700$; they are sold by Division High for $$1,200.$ The tax authorities in both countries allow firms to use either variable cost or full cost as the transfer price.

Problem:

Analyze the effect of full$-$cost and variable$-$cost transfer pricing methods on Phipps' cash flows. Can you solve this using the tenth edition of Accounting for Decision Making and Control by Jerold L$.$ Zimmerman, chapter $5.$ Remember to state your problem, alternatives, solution methodology, recommendations, conclusions.