Question

Sharpex (Hong Kong) exports 1,000 containers of razor blades to its U.S. based parent company, Eversharp. Use the following information to calculate the consolidated after-tax profit.

• The direct cost for the Hong Kong division is USD 10,000 per unit
• The overhead cost for the Hong Kong division is USD 6,000 per unit
• The desired markup for the Hong Kong division is 22%
• Hong Kong tax rate is 15%

• The direct cost per unit for the U.S. parent is transfer price (sale price) of the Hong Hong division
• The overhead cost for the U.S. parent is USD 1,000 per unit
• The desired markup for the U.S. parent is 10%
• The tax rate for the U.S. parent is 35%

	a.	USD 3,598,000
	b.	USD 3,793,200
	c.	USD 3,980,200
	d.	USD 4,075,750
	e.	USD 4,325,800

Answer 1

Solution:-

The total after-tax profit= After-tax profit of Hongkong subsidiary + After-tax profit of US head office

Calculations for HongKong subsidiary:

Total cost per unit (HongKong subsidiary)= $10,000 + $6,000 = $16,000

Sale price per unit to head office= $16,000*(100% + 22%)= $19,520

After-tax per unit for HongKong subsidiary= ($19,520-$16,000)*(1-tax rate) = $3,520*(1-15%)= $2,992

Calculations for Head office:

Total cost per unit of head office= $19,520 + $1,000 = $20,520

Sale price per unit to end customers= $20,520*(100% + 10%)= $22,572

After-tax per unit= ($22,572-$20,520)*(1-tax rate) = $2,052*(1-35%)= $1,333.8

Total after-tax profit per unit for whoile organization= $2,992 + $1,333.8= $4,325.8

Total after-tax profit for 10,00 units= $4,325.8*10,00 = $4,325,800

Thus, the correct option is option e.