Question

The Nature and Wildlife Corporation has manufacturing facilities in country A and an assembly plant in country B. In June 2017, the company will ship 1,000 units with a production cost of $65 per unit to its plant in country B. Its operating expenses in country A are $15,000 for the month. The income tax rate in country A is 20% and in country B it is 40%. The company plans to have a transfer price of $100 per unit. The final product can be sold in country B for $140. Country B’s operating expenses are $10,000 during the month. Could the company benefit by changing the transfer price to $120?

Answer 1

STATEMENT SHOWING THE COMBINED PROFITS
			COUNTRY A	COUNTRY B	TOTAL
Sales revenue
A (1000 units @$ 120)			120000
B (1000 units @$140)				140000	260000
Less: Cost of Goods sold
A (1000 units @$ 65)			65000
B (1000 units @$120)				120000	185000
Gross Margin			55000	20000	75000
Less: Operating expense			15000	10000	25000
Net Income before tax			40000	10000	50000
Less: Tax
A ($40000*20%)			8000
B (10000*40%)				4000	12000
Net income after tax			32000	6000	38000
The company will be benefitted by $4000 of profits
This is because of fact that the income has been shifted from more tax country to less tax country