American Medical Instruments produces a variety of medical products at its plant in Minneapolis. The company has sales divisions worldwide. One of the sales divisions is located in Uppsala, Sweden. Assume that the U.S. income tax rate is 34%, the Swedish rate is 60%, and a 12% import duty is imposed on the medical supplies brought into Sweden.
One product is produced in Minneapolis and shipped to Sweden is a heart difribilator. The variable cost of production is $400 per unit, and the fully allocated cost is $650 per unit.
Suppose the Swedish and the U.S. governments allow either the variable or the fully allocated cost to be used as a transfer price. Which should American Medical Instruments choose to minimize the total income taxes and import duties? Compute the amount the company saves if it uses your transfer price instead of the alternative. Assume the duties are not deductible for tax purposes.