Periwinkle Company is a multinational organization. Its Parts Division is located in Lavender Land, while its Assembly Division is located in North Orchid.
During the current year Periwinkle Company’s Parts Division (located in Lavender Land) incurred production costs of $3,000,000 for mauve parts that are transferred to its Assembly Division (located in North Orchid). The Assembly Division must spend an additional $9,000,000 in labor to produce purple widgets. The Assembly Division sells the final product – Purple Widgets – for $33,333,333 in North Orchid.
Other companies in North Orchid import similar mauve parts at a cost of $6,000,000. Periwinkle Company has set its transfer price at $15,000,000 justifying this price because of the security measures it has on the operations in the Parts Division as well as its unique manufacturing method. However, government officials are questioning the transfer price. The tax rate in Lavender Land where the Parts Division is located is 35%, while the tax rate for Assembly Division’s country North Orchid is 65%.
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Consider the following transfer prices:
- $3,000,000 the Parts Division variable cost for the mauve parts
- $6,000,000 the Market Price for the mauve parts
- $15,000,000 that Periwinkle claims is justified
- What is the tax liability and profit for Periwinkle under all three prices? (answer here or on the speadsheet)
- How could Periwinkle argue for a $15,000,000 price? (answer here)