Phipps manufactures circuit boards in Division A a country 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.

The Assignment:

Part 1: Analyze the effect of both full-cost and variable-cost transfer pricing methods on Phipps cash flows using a spreadsheet program such as Excel.

Part 2: Make your recommendation as to how the organization should proceed being sure to justify your recommendation with examples form this weeks resources and/or additional research. Complete this aspect of the Assignment by using a word processing program such as Word.