Diamonds Ltd, based in Los Angeles, has two divisions:
- South African mining division, which mines a rich diamond vein in South Africa
- US processing division, which polishes raw diamonds for use in industrial cutting tools
Although all the mining division's output of 7,213 kilograms of raw diamonds is sent for processing in the US, there is also an active market for raw diamonds in South Africa.The foreign exchange rate is 5.57 ZAR (South African Rand) = US$1. The following information is known about the South African division:
Variable cost per kg of raw diamonds: 563 ZAR
Fixed cost per kg of raw diamonds: 1,126 ZAR
Market price per kg of raw Diamonds: 3,776 ZAR
Tax rate: 25%
The tax rate for US Processing Division is 40%.
What would be the difference in operating income after tax (in US$) for Diamond Ltd if transfer price of 237% of full cost is used instead of the market price per kg of raw diamonds(rounded to the nearest integer)?