Question

Crain Company has a manufacturing subsidiary in Singapore that produces high-end exercise equipment for U.S. consumers. The manufacturing subsidiary has total manufacturing costs of $1,550,000, plus general and administrative expenses of $355,000. The manufacturing unit sells the equipment for $2,550,000 to the U.S. marketing subsidiary, which sells it to the final consumer for an aggregate of $3,550,000. The sales subsidiary has total marketing, general, and administrative costs of $205,000. Assume that Singapore has a corporate tax rate of 33% and that the U.S. tax rate is 46%. Assume that no tax treaties or other special tax treatments apply.

Required:

What is the effect on Crain Company’s total corporate-level taxes if the manufacturing subsidiary raises its price to the sales subsidiary by 20%? (Do not round intermediate calculations. Input all amounts as positive values.)

Answer 1

ANSWER

Income prior to increase in transfer price	Total effect on subsidiaries	Singapore	US
Revenues	6100000	2550000	3550000
Direct Costs	4100000	1550000	2550000
Other Costs	560000	355000	205000
Profit before tax	1440000	645000	795000
Tax	578550	212850	365700
Profit after tax	861450	432150	429300
Income after increase in transfer price
Revenues	6610000	3060000	3550000
Direct Costs	4610000	1550000	3060000
Other Costs	560000	355000	205000
Profit before tax	1440000	1155000	285000
Tax	512250	381150	131100
Profit after tax	927750	773850	153900
Difference in after-tax profit	66300

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