People Able Computer, Inc., with headquarters in SanFrancisco, manufactures and sells a desktop computer. People Able has three divisions, each of which is located in a different country. Each division is run as a profit center. Information on each division follows:

The costs for the work done in each division for a single desktop computer are as follows:

China division: Variable cost = 1,200 yuan

Fixed cost = 1,800 yuan

South Korea division: Variable cost = 340,000 won

Fixed cost = 490,000 won

U.S. division Variable cost = $110

Fixed cost = $190

times• Chinese income tax rate on the China division's operating income: 40%

times• South Korean income tax rate on the South Koreadivision's operating income: 20%

times• U.S. income tax rate on the U.S. division's operatingincome: 30%

Each desktop computer is sold to retail outlets in the United States for $4,200. Assume that the current foreign exchange rates are as follows:

8 yuan = $1 U.S.

1,000 won = $1 U.S.

Both the China and the South Korea divisions sell part of their production under a private label. The China division sells the comparable memory/keyboard package used in each People Able desktop computer to a Chinese manufacturer for 4,200 yuan. The South Korea division sells the comparable desktop computer to a South Korean distributor for 1,450,000 won.

1. Calculate the after-tax operating income per unit earned by each division under the following transfer-pricing methods: (a) market price, (b) 200% of fullcost, and (c) 400% of variable cost (Income taxes are not included in the computation of thecost-based transfer prices.)

2. Which transfer-pricing method(s) will maximize the after-tax operating income per unit of People Able Computer?

Answer rating: 100% (QA)

1 Market Price 200 of Full Cost 400 of Variable cost China division Selling price TP 525 750 600 ... View the full answer