Question

Your company makes leather recliners.The leather is prepared in Mexico by a branch of your company...

Your company makes leather recliners.The leather is prepared in Mexico by a branch of your company then shipped to the US for construction.The recliners sell for $300 each.Your lawyers have advised you that the leather can be valued anywhere between $80 and $120.The costs in Mexico are $60, the additional costs in the US are $100.The Mexican tax rate you face is 25%, and assume that your US rate is 35%.

  1. What price would you set for the leather to minimize taxes?
  2. Now assume the US charges a 15% tariff on the leather. What price do you now want to charge?
  3. Would you be better off if you had a subsidiary rather than a branch in Mexico? Discuss.
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Answer #1

a) As no information is given regarding tax credits, it is assumed that there are no tax credits and will increase the price of the leather to $100 to increase revenue as it is being sold at $300 in US

b) The price of the leather is decided to be $115,as there is an increase in tariff.Tariff on leather exports from Mexico is 15%. So $115 - 15% = $97.75

c)A subsidiary company in US will helps to avoid taxes, and whatever the products produced in Mexico will be directly brought to subsidiary company and so that there will be increase in profits

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