Question

Crain Company has a manufacturing subsidiary in Singapore that produces high-end exercise equipment for U.S. consumers. The manufacturing subsidiary has total manufacturing costs of $1,530,000, plus general and administrative expenses of $353,000. The manufacturing unit sells the equipment for $2,530,000 to the U.S. marketing subsidiary, which sells it to the final consumer for an aggregate of $3,530,000. The sales subsidiary has total marketing, general, and administrative costs of $203,000. Assume that Singapore has a corporate tax rate of 33% and that the U.S. tax rate is 46%. Assume that no tax treaties or other special tax treatments apply. Required:

What is the effect on Crain Company’s total corporate-level taxes if the manufacturing subsidiary raises its price to the sales subsidiary by 20%? (Do not round intermediate calculations. Input all amounts as positive values.)

Answer 1

Computation of total taxes to be paid by Crain Company before raise in prices by the Manufacturing department:

Particulars	Manufacturing Subsidiary	Marketing Subsidiary
Sales	$2,530,000	$3,530,000
Expenses:
Manufacturing Costs	$1,530,000	$0
Purchase Cost	$0	$2,530,000
General and administrative expenses	$353,000	$203,000
Profit Before Taxes	$647,000	$797,000
Tax rates	33%	46%
Taxes	$213,510	$366,620
Total taxes paid by Crain Company	$580,130

Computation of total taxes to be paid by Crain Company after raise in prices by the Manufacturing department:

Particulars	Manufacturing Subsidiary	Marketing Subsidiary
Sales	$3,036,000	$3,530,000
	($2,530,000*120%)
Expenses:
Manufacturing Costs	$1,530,000	$0
Purchase Cost	$0	$3,036,000
General and administrative expenses	$353,000	$203,000
Profit Before Taxes	$1,153,000	$291,000
Tax rates	33%	46%
Taxes	$380,490	$133,860
Total taxes paid by Crain Company	$514,350

So overall there is decrease of $65,780 ($580,130 - $514,350) in Crain Company’s total corporate-level taxes if the manufacturing subsidiary raises its price to the sales subsidiary by 20%.

There was another simple way to do calculate the corporate-level taxes of Crain Company:

Particulars	$
Change in the prices	506,000
	($2,530,000*20%)
Tax Rate*	13%
Decrease in Taxes	65,780

* As the tax rate in Singapore is less than in the USA, for the whole corporate level there is reduction in tax rate by 13% (46%-33%).