Question

Case 1 Industrial Diamonds, Inc., based in Los Angeles, has two divisions: Philippine Mining Division -- operates a mine in the Philippines containing a rich body of raw diamonds. U.S. Processing Division --processes the raw diamonds into polished diamonds used in industrial applications. The costs of the Philippine Mining Division are: Variable costs, 4,000 pesos per pound of raw diamonds Fixed costs, 8,000 pesos per pound of raw diamonds The Philippine Mining Division can sell its raw diamonds to several diamond-polishing companies in the Philippines for 16,000 pesos per pound. Assume that the current foreign exchange rate is 40 pesos = $1 U.S. The costs of the US Processing Division are: Variable costs, $200 per pound of polished diamonds Fixed costs, $600 per pound of polished diamonds Assume that it takes 2 pounds of raw diamonds to yield 1 pound of polished diamonds. Polished diamonds sell for $4,000 per pound in the U.S. market. Required: Assume that the corporate income tax rate is 20% in the Philippines and 35% in the United States. Also assume that 1,000 pounds of raw diamonds are mined by the Philippine Division and then transferred to the U.S. Processing Division for further processing Compute the total after-tax operating income (in $U.S.) for each division assuming the "market price" is used as a basis for determining the transfer price.

Given the information above, assuming that the question is tweaked, instead of assuming the market price, assume 200% of full cost. compute the after-tax operating( in $U.S) for each division assuming the "200% of full cost" is used a basis for determining the transfer price.

Can someone help with this question? please help and thanks in advance!

The solution is provided below when it's under "Market Price" but now we have to compute if it were under "200% of full cost"

Answer 1

After-tax operating income (in $U.S) for each division assuming "200% of full cost"

	Philippine Division	US Division
Revenue	$400*1000 = $400,000	$4000*500 = $2,000,000
Costs
Transfer Price	0	$300,000*200% = $600,000
Variable cost	$100*1000 = $100,000	$200*500 = $100,000
Fixed cost	$200*1000 = $200,000	$600*500 = $300,000
Total costs	$300,000	$1,000,000
Before tax income	$100,000	$1,000,000
Income Taxes	$100,000*20% = $20,000	$350,000
After tax income	$80,000	$650,000

Full cost for Philippine Division = $100,000 + $200,000 = $300,000

Thus Transfer price for US Division = $300,000 * 200% = $600,000