Question

Gage Corporation has two operating divisions in a semiautonomous organizational structure. Adams Division, located in the United States, produces a specialized electrical component that is an input to Bute Division, located in the south of England. Adams uses idle capacity to produce the component, which has a domestic market price of $11. Its variable costs are $6 per unit. Gage’s U.S. tax rate is 30 percent of income.

In addition to the transfer price for each component received from Adams, Bute pays a $5 per unit shipping fee. The component becomes a part of its assembled product, which costs an additional $1 to produce and sells for an equivalent of $24. Bute could purchase the component from a Manchester (England) supplier for $9 per unit. Gage’s English tax rate is 60 percent of income. Assume that English tax laws permit transferring at either variable cost or market price.

Required:

a-1. What are the respective profits after tax for both the Adams Division and Bute Division of Gage if the transfer price is $6. (Round your answers to 2 decimal places.)

a-2. What are the respective profits after tax for both the Adams Division and Bute Division of Gage if the transfer price is $11. (Round your answers to 2 decimal places.)

a-3. What transfer price is economically optimal for Gage Corporation?

	The transfer price economically optimal for Gage Corporation is $6 per unit.
	The transfer price economically optimal for Gage Corporation is $11 per unit.

Answer 1