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 $1,540,000, plus general and administrative expenses of $354,000. The manufacturing unit sells the equipment for $2,540,000 to the U.S. marketing subsidiary, which sells it to the final consumer for an aggregate of $3,540,000. The sales subsidiary has total marketing, general, and administrative costs of $204,000. 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 is complete but not entirely correct. Total from Subsidiaries Income prior to increase in transfer price Revenues Direct costs Other costs Profit before tax Tax Profit after tax 6,080,000 (4,080,000) (558,000) 1,442,000 (579,340) 862,660 $ Income after increase in transfer price Revenues Direct costs Other costs Profit before tax Tax Profit after tax 6,588,000 (4,588,000) (558,000) 1,442,000 (513,300) 928,700 Difference in after-tax profit $ 66,040

Answer 1

Total from Subsidiaries Income prior to increase in transfer price Revenues Direct Costs Other Costs Profit before tax Tax Profit after tax 6,080,000 4,080,000 558,000 1,442,000 579,340 862,660 Income after increase in transfer price Revenues Direct Costs Other Costs Profit before tax Tax Profit after tax 6,588,000 4,588,000 558,000 1,442,000 513,300 928,700 Difference in after-tax profit 66,040

All the numbers that you have calculated are correct but they had to be input as positive values (mentioned in red). Hence you were getting an error for the negative numbers.

Hope it helps.

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