Problem 2: Jonah and the Whale

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 Ys 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. Jonahs 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 companys 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.?