Question

Sharpex (Hong Kong) exports 1,000 containers of razor blades to its U.S. based parent company, Eversharp. Use the following information to calculate the consolidated after-tax profit.

• The direct cost for the Hong Kong division is USD 10,000 per unit
• The overhead cost for the Hong Kong division is USD 6,000 per unit
• The desired markup for the Hong Kong division is 22%
• Hong Kong tax rate is 15%

• The direct cost per unit for the U.S. parent is transfer price (sale price) of the Hong Hong division
• The overhead cost for the U.S. parent is USD 1,000 per unit
• The desired markup for the U.S. parent is 10%
• The tax rate for the U.S. parent is 35%

	a.	USD 3,793,200
	b.	USD 4,075,750
	c.	USD 4,325,800
	d.	USD 3,598,000
	e.	USD 3,980,200

Answer 1

We can calculate the desired results as follows

For Hong Kong company Sharpex:

Sales in Units	Total Cost (Direct cost + Overhead cost)	Markup Price or Profit amount (22% of Total Cost)	Tax Paid @ 15% (15% of Markup)	Profit After tax (Markup - Tax paid)
1,000 Units	1000 * (10,000 + 6,000)	22% * 16,000,000	15% * 3,520,000	3,520,000 - 528,000
	= $ 16,000,000	= $ 3,520,000	= $ 528,000	= $ 2,992,000

After tax profit of Sharpex: $ 2,992,000

For U.S company Eversharp:

Direct Cost for US company = Total Cost per Unit of Sharpex + Markup Price of Sharpex

= 16,000,000 + 3,520,000

= $ 19,520,000

Overhead Cost for US company = Total Units * Overhead cost

= 1000 * 1000

= $ 1,000,000

Sales in Units	Total Cost (Direct cost + Overhead cost)	Markup Price or Profit amount (10% of Total Cost)	Tax Paid @ 15% (35% of Markup)	Profit After tax (Markup - Tax paid)
1,000 Units	$ 19,520,000 + 1,000,000	10% * 20,520,000	35% * 2,052,000	2,052,000 - 718,200
	= $ 20,520,000	= $ 2,052,000	= $ 718,200	= $ 1,333,800

After tax profit of Eversharp: $ 1,338,800

Total Consolidated After tax profit = After tax profit of Sharpex + After tax profit of Eversharp

= 2,992,000 + 1,338,800

= $ 4,325,800

So, the correct answer is option (c)

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