Question

A North American tire manufacturing company owns a rubber plantation in Brazil through its Brazilian subsidiary. It is deciding whether to open its new tire manufacturing facility in the US or Canada. The new facility will produce 1 million tires per year and expects to sell them at $100 per tire irrespective of the location in which the facility is opened. Each tire is expected to require 50 pounds of rubber. All of the rubber required for the tires is expected to be procured from the Brazilian subsidiary and shipped to the plant. The costs of shipping the rubber will be borne by the subsidiary which gets the manufacturing facility. If the facility is opened in the US, the US subsidiary will incur shipping costs of $25 per 50 pounds of rubber and additional costs for manufacturing the tire incurred by the US subsidiary is $30 per tire (excluding the cost of rubber transferred from Brazil). If the facility is opened in Canada, the Canadian subsidiary will incur shipping costs of $30 per 50 pounds of rubber and additional costs for manufacturing the tire incurred by the Canadian subsidiary is $35 per tire (excluding the cost of rubber transferred from Brazil). At the expected demand for rubber from the new manufacturing facility, the Brazilian subsidiary estimates its full absorption cost per pound of rubber to be $0.4. Assuming that corporate tax rates are 15% in Canada, 35% in the US and 20% in Brazil and tax authorities in the 3 countries will allow any transfer price between full absorption cost and $0.6 per pound of rubber, where would the tire manufacturing company prefer to open its tire manufacturing facility? (1.5 points)

Answer 1

Answer:

From the evaluation of the below workings it can be said that it will be better for the tire manufacturing company to open its manufacturing facility in US as the profit are comparably higher to that of Canada. Opening the manufacturing facility in US will be a great option for the tire manufacturing firm.

Workings:

Brazil Particulars tires/ year = each tire = Amount/ Quantity 10,00,000.00 50.00 Tires / year (1000000* 50) = Absorption cost/ pound/ year = Fixed Tire Cost / year ($) (50000000 * $ 0.60)= Tire Selling price/ year ($) (1000000* $100) = 5,00,00,000.00 0.60 3,00,00,000.00 10,00,00,000.00

Particulars Facility US 2,50,00,000.00 Canada 3,00,00,000.00 Shipping Cost ($) (1000000* $25) = Adiitional Manufacturing Cost ($) (1000000*$30 for US) and (1000000* $35 for Canada)= 3,00,00,000.00 3,50,00,000.00 Total Regional Cost ($) = Fixed Tire Cost / year ($) = 5,50,00,000.00 3,00,00,000.00 6,50,00,000.00 3,00,00,000.00 Total Cost ($) = Tire Selling price/ year ($) = 8,50,00,000.00 10,00,00,000.00 9,50,00,000.00 10,00,00,000.00 1,50,00,000.00 50,00,000.00 PBIT / Profit before Interest and Tax ($) = Less: Interest ($)= PBT / Profit before tax ($) = Less: Tax ($) ( 35% for US and 15% for Canada) = Actual Profit at the end of the year after tax ($) = 1,50,00,000.00 52,50,000.00 97,50,000.00 50,00,000.00 7,50,000.00 42,50,000.00