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 $13. Its variable costs are $5 per unit. Gage's U.S. tax rate is 40 percent of income.
In addition to the transfer price for each component received from Adams, Bute pays a $2 per unit shipping fee. The component becomes a part of its assembled product, which costs an additional $3 to produce and sells for an equivalent of $23. Bute could purchase the component from a Manchester (England) supplier for $9 per unit. Gage's English tax rate is 70 percent of income. Assume that English tax laws permit transferring at either variable cost or market price.
Required:
What are the respective profits after tax for both the Adams Division and Bute Division of Gage if the transfer price is $5.
What are the respective profits after tax for both the Adams Division and Bute Division of Gage if the transfer price is $13.