Phipps manufactures circuit boards in Division A in a country with a 30 percent income tax rate and transfers them to Division B in a country with a 40 percent income tax. An import duty of 15 percent of the transfer price is paid on all imported products. The import duty is not deductible in evaluating 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 transfer price.
The Assignment:
Examine 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 organization should proceed, being sure to validate your recommendation with examples from this week's Resources or additional research.