American Medical Instruments produces a variety of medical products at its plant in Minneapolis. The company has sales division worldwide. One of these sales division is located in Uppsala, Sweden. Assume that the US income tax rate is 34%, the Swedish rate is 60% and a 12% import duty is imposed on medical supplies brought into Sweden.
One product produced in Minneapolis and shipped to Sweden is a heart defibrillator. The variable cost of production is $400 per unit, and the fully allocated cost is $650 per unit.
1. Suppose the Swedish and US government allow either the variable or fully allocated cost to be used as a transfer. Which price should American Medical Instruments choose to minimize the total of income taxes and import duties?
2. Suppose the Swedish parliaments passed a law decreasing the income tax rate to 50% and increasing the duty on hear monitors to 20%.