Question

MBS is organized into two divisions-Fabrication and Marketing. Fabrication produces a product that can be sold immediately or transferred to Marketing for customization and then sold. Marketing only buys from Fabrication for quality control reasons. Fabrication currently sells 20,000 units annually at a price of $200 per unit to outside customers. It sells an additional 10,000 units to Marketing. The unit variable cost in Fabrication is $100 and annual fixed costs are $1.0 million. Fabrication is located in a country with a 30 percent tax rate. Marketing can sell customized units for $400 each. In addition to what it pays Fabrication, the variable costs in Marketing are $50 per unit. Annual fixed costs in Marketing are $1.2 million. Marketing is located in a country with a 20 percent tax rate. Required: a. Suppose Fabrication would have excess capacity even with the demand from Marketing. Ignoring tax implications, what transfer price would you recommend MBS adopt? b. What would be the total taxes MBS paid under the policy you recommend in requirement (a)? (Enter your answers in dollars and not in millions of dollars.) c. Suppose Fabrication has no excess capacity. Ignoring tax implications, what transfer price would you recommend MBS adopt? d. What would be the total taxes MBS paid under the policy you recommend in requirement (C)? (Enter your answers in dollars and not In millions of dollars.) a. Transfer price (Excess capacity)= ??? b.Total taxes paid (Excess capacity)= ??? c.Transfer price (No excess capacity)= ??? d.Total taxes paid (No excess capacity)= ???

Answer 1

a. Transfer price (Excess capacity)= $ 100/unit

b. Total taxes paid (Excess capacity)= $ 560,000

Computation

Particulars	Calculation	Fabrication	Marketing
External sales	20000 X 200, 10000 X 400	4,000,000	4,000,000
Internal Transfers	10000 X 100	1,000,000	--
Total Revenue		5,000,000	4,000,000
Less
Variable cost	100 X 30000, (50+100) X 10000	3,000,000	1,500,000
Annual Fixed cost		1,000,000	1,200,000
Net Profit		1,000,000	1,300,000
Tax on net profit	@30%, @20%	300,000	260,000

c. Transfer price (No excess capacity)= $ 150/unit

d. Total taxes paid (No excess capacity)= $ 390,000

Computation

Particulars	Calculation	Fabrication	Marketing
External Sales	10000 X 200, 10000 X 400	2,000,000	4,000,000
Internal Transfers	10000 X 150	1,500,000	--
Total Revenue		3,500,000	4,000,000
Less Variable Cost	20000 X 100, 10000 X (150+50)	2,000,000	2,000,000
Less Annual Fixed Cost		1,000,000	1,200,000
Net Profit		500,000	800,000
Tax on net profit	@30%, @20%	150,000	240,000