Phipps manufactures circuit boards in Division A in a country with a 30% income tax rate and transfers them to Division B in a country with a 40% income tax. An import duty of 15% of the transfer price is paid on all imported products. The import duty is not deductible in computing taxable income. The circuit boards' full cost is $1,000 and variable cost is $700; they are sold by Division B for $1,200. The tax authorities in both countries allow firms to use either variable cost or full cost as the transfer price.
The Assignment:
Analyze the effect of both full-cost and variable-cost transfer pricing methods on Phipps' cash flows using a spreadsheet program such as Excel. Make your recommendation as to how the organization should proceed, being sure to justify your recommendation with examples from this week's Resources or additional research. Complete this aspect of the Assignment by using a word processing program such as Word.