Question - Phipps manufactures circuit boards in Division A, a county with a 30% income tax rate, and transfers them to Division B, 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 $1000 and variable cost is $700; they are sold by Division B for $1200. The tax authorities in both countries allow firms to use either variable cost or full cost as the transfer price.
Analyze the effect of both full-cost and variable cost transfer pricing methods on Phipps cash flows.