Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Periwinkle Company is a multinational organization. Its Parts Division is located in Lavender Land, while its Assembly Division is located in North Orchid. During the

Periwinkle Company is a multinational organization. Its Parts Division is located in Lavender Land, while its Assembly Division is located in North Orchid.

During the current year Periwinkle Company’s Parts Division (located in Lavender Land) incurred production costs of $3,000,000 for mauve parts that are transferred to its Assembly Division (located in North Orchid). The Assembly Division must spend an additional $9,000,000 in labor to produce purple widgets. The Assembly Division sells the final product – Purple Widgets – for $33,333,333 in North Orchid.

Other companies in North Orchid import similar mauve parts at a cost of $6,000,000. Periwinkle Company has set its transfer price at $15,000,000 justifying this price because of the security measures it has on the operations in the Parts Division as well as its unique manufacturing method. However, government officials are questioning the transfer price. The tax rate in Lavender Land where the Parts Division is located is 35%, while the tax rate for Assembly Division's country North Orchid is 65%.

Consider the following transfer prices:

  • $3,000,000 the Parts Division variable cost for the mauve parts
  • $6,000,000 the Market Price for the mauve parts
  • $15,000,000 that Periwinkle claims is justified

Required:

  1. What is the tax liability and profit for Periwinkle under all three prices? (answer here or on the speadsheet)
  2. How could Periwinkle argue for a $15,000,000 price? (answer here)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

a The profit and tax liability for Periwinkle under all the three prices are as follows i Transfer P... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Engineering Economy

Authors: Leland T. Blank, Anthony Tarquin

8th edition

73523439, 73523437, 978-0073523439

More Books

Students also viewed these General Management questions

Question

Find the sum of the series Correct to four decimal places. 1)a+1

Answered: 1 week ago