Problem
One reason for companies to set transfer pricing policy is to move profits from one division to another. This may be done for competitive reasons, when the goal is to challenge division management to act as a standalone company in order to compare a division with its competitors. Another reason to move profits is for tax purposes or other cost savings for the company as a whole.
Selling Division sells 33,000 units to Buying Division. Selling Division's tax rate is 15%, and Buying Division's tax rate is 20%. Market price is $68.80 per unit, and it costs Selling Division $27.00 to produce each unit.
Which transfer pricing method should Overall Corporation use when Selling Division sells to Buying Division to take advantage of the best tax rate? Market Based ( correct answers)
1) What is the savings when this method is used?