Question

In: Accounting

Varzesh is a sports equipment company with its corporate headquarters in country A and has three...

Varzesh is a sports equipment company with its corporate headquarters in country A and has three wholly owned subsidiaries in countries B, C and D. The corporate income taxes are 21%, 25%, 29% and 22% for countries A, B, C, and D respectively. Varzesh is going to manufacture a new sports ball called Toop in, and only in, one of the three countries: B, C, or D. The manufacturing cost is $100, and it will be sold in equal quantities in all four countries for $370. The transfer price for Toop is $320. There are no other costs or revenues.

1 - Which country is the best choice to manufacture the Toop in order to minimize taxes paid globally?

2 - If Varzesh sells only one unit in each country, then what is the minimum total tax amount paid globally? Enter your answer rounded to the first decimal place.

3 - If the customs authority pushes Varzesh to fix the transfer price at $260, then which country is the best choice to manufacture the Toop in order to minimize taxes paid globally?

4 - If the transfer price is equal to $260, what is the minimum total tax amount paid globally if Varzesh sells only one unit in each country? Enter your answer rounded to the first decimal place.

Solutions

Expert Solution

1. Let the total production be X

First we assume that product is manufactured in country A and (X/4) is sold in each of the country.

Tax paid in country A=(320-100)*0.21*X+(X/4)*(370-320)*0.21=48.825X

Tax paid in country B=(X/4)*(370-320)*0.25=3.125X

Tax paid in country C=(X/4)*(370-320)*0.29=3.625X

Tax paid in country D=(X/4)*(370-320)*0.22=2.75X

Total tax paid=(48.825+3.125+3.625+2.75)*X=58.325X

Now, we assume that product is manufactured in country B and (X/4) is sold in each of the country.

Tax paid in country A=(X/4)*(370-320)*0.21=2.625X

Tax paid in country B=(320-100)*0.25*X+(X/4)*(370-320)*0.25=58.125X

Total tax is minimized in case of country A

Tax paid in country C=(X/4)*(370-320)*0.29=3.625X

Tax paid in country D=(X/4)*(370-320)*0.22=2.75X

Total tax paid=(2.625+58.125+3.625+2.75)*X=67.125X

Now, we assume that product is manufactured in country C and (X/4) is sold in each of the country.

Tax paid in country A=(X/4)*(370-320)*0.21=2.625X

Tax paid in country B=(X/4)*(370-320)*0.25=3.125X

Tax paid in country C=(320-100)*0.29*X+(X/4)*(370-320)*0.29=67.425X

Tax paid in country D=(X/4)*(370-320)*0.22=2.75X

Total tax paid=(2.625+3.125+67.425+2.75)*X=75.925X

Now, we assume that product is manufactured in country D and (X/4) is sold in each of the country.

Tax paid in country A=(X/4)*(370-320)*0.21=2.625X

Tax paid in country B=(X/4)*(370-320)*0.25=3.125X

Tax paid in country C=(X/4)*(370-320)*0.29=3.625X

Tax paid in country D=(320-100)*0.22*X+(X/4)*(370-320)*0.22=51.15X

Total tax paid=(2.625+3.125+3.625+51.15)*X=60.525X

Total tax is minimized in case of country A

2.Total tax paid in case of country A=(48.825+3.125+3.625+2.75)*X=58.325X

Put X=4

Total tax paid in case of country A=58.325*4=$233.30

3.Let the total production be X

First we assume that product is manufactured in country A and (X/4) is sold in each of the country.

Tax paid in country A=(260-100)*0.21*X+(X/4)*(370-260)*0.21=39.375X

Tax paid in country B=(X/4)*(370-260)*0.25=6.875X

Tax paid in country C=(X/4)*(370-260)*0.29=7.975X

Tax paid in country D=(X/4)*(370-260)*0.22=6.05X

Total tax paid=(39.375+6.875+7.975+6.05)*X=60.275X

Now, we assume that product is manufactured in country B and (X/4) is sold in each of the country.

Tax paid in country A=(X/4)*(370-260)*0.21=5.775X

Tax paid in country B=(260-100)*0.25*X+(X/4)*(370-260)*0.25=46.875X

Tax paid in country C=(X/4)*(370-260)*0.29=7.975X

Tax paid in country D=(X/4)*(370-260)*0.22=6.05X

Total tax paid=(5.775+46.875+7.975+6.05)*X=66.675X

Now, we assume that product is manufactured in country C and (X/4) is sold in each of the country.

Tax paid in country A=(X/4)*(370-260)*0.21=5.775X

Tax paid in country B=(X/4)*(370-260)*0.25=6.875X

Tax paid in country C=(260-100)*0.29*X+(X/4)*(370-260)*0.29=54.375X

Tax paid in country D=(X/4)*(370-260)*0.22=6.05X

Total tax paid=(5.775+6.875+54.375+6.05)*X=73.075X

Now, we assume that product is manufactured in country D and (X/4) is sold in each of the country.

Tax paid in country A=(X/4)*(370-260)*0.21=5.775X

Tax paid in country B=(X/4)*(370-260)*0.25=6.875X

Tax paid in country C=(X/4)*(370-260)*0.29=7.975X

Tax paid in country D=(260-100)*0.22*X++(X/4)*(370-260)*0.22=41.25X

Total tax paid=(5.775+6.875+7.975+41.25)*X=61.875X

Total tax is minimized in case of country A

4. Total tax paid in country A=(39.375+6.875+7.975+6.05)*X=60.275X

Let X=4

Total tax paid in country A=6


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