Part 2: Make a recommendation as to how the organization should proceed, being sure to justify your recommendation with examples or additional research.

Digi Control International Inc. manufactures robotic controllers in Division A, a country with a 30% income tax rate, and transfers them to Division B, a country with a 40% income tax. An import duty of 15% of the transfer price is paid on all imported products. The import duty is not deductible in computing taxable income. The controllers full cost is $1,800 and variable cost is $1,000; they are sold by Division B for $2,200. The tax authorities in both countries allow firms to use either variable cost or full cost as the transfer price.

	Full Cost		Variable Cost
Division A Taxes:
Transfer Price
Less Cost
Taxable Income	0		0
Taxes in Low Country (or refund)
Division B Taxes:
Sales Price
Less Transfer Price
Taxable Income	0		0
Income Taxes
Import Duty
Taxes in High Country (or refund)	0		0
Total Taxes

Part 1: Analyze the effect of both full-cost and variable-cost transfer pricing methods on cash flows using a spreadsheet program such as Excel.

Part 2: Make your recommendation as to how the organization should proceed, being sure to justify your recommendation with examples form this weeks Resources, and/or additional research. Complete this aspect of the Assignment by using a word processing program such as Word.

• Low Country (or refund)	0	240
  Division B Taxes:
  Sales Price	2200	2200
  Less Transfer Price	1800	1000
  Taxable Income	400	1200
  Income Taxes at 40%	-160	-480
  Import Duty (1800*15%)&(1000*15%)	-270	-150
  Taxes in High Country (or refund)	-430	-630
  Total Taxes	-430	-390

  Summary
  Taxable income :	Full cost	Var. cost
  Divn.A	0	-800
  Divn. B	400	1200
  Total TI	400	400
  tax refund(divn.A)		240
  IT & Imp.duty	-430	-630
  Overall NI	-30	10

  Part-2

  The -ve sign with taxes & import duty indicates expenditure/cash outflow--

  Given that the

  The import duty is not deductible in computing taxable income

  the total outflow towards taxes & import duties is less under the transfer pricing by variable cost method ----due to the loss made by the transferor division (Divn.A) due to pricing the transfer at its variable cost.In this method of pricing, the import duty, of Divn.B is more than off-set by the tax tax-refund on loss of Div