Question

Chinglish Dirk Company​ (Hong Kong) exports razor blades to its wholly owned parent​ company, Torrington Edge​ (Great Britain). Hong Kong tax rates are 16​% and British tax rates are 30​%. The markup was​ 15% and the sales volume was 1,500 units. Chinglish calculates its profit per container as follows​ (all values in British​ pounds):

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Corporate management of Torrington Edge is considering repositioning profits within the multinational company. What happens to the profits of Chinglish Dirk and Torrington​ Edge, and the consolidated results of​ both, if the markup at Chinglish was increased to​ 20% and the markup at Torrington was reduced to​ 10%? What is the impact of this repositioning on consolidated​ after-tax profit and total tax​ payments?

Calculate the profits of Chinglish Dirk and Torrington​ Edge, and the consolidated results of​ both, if the markup at Chinglish was increased to​ 20% and the markup at Torrington was reduced to​ 10% in the following​ table:  ​(Round to the nearest British​ pound.)

Constructing Transfer		Chinglish Dirk		Torrington Edge		Consolidated
(Sales) Price per Unit		(British pounds)		(British pounds)		(British pounds)
Direct costs	£	12,000	£
Overhead		4,000		1,000
Total costs	£	16,000	£
Desired markup
Transfer price (sales price)	£		£
Income Statement
Sales price	£		£
Less total costs
Taxable income	£		£
Less taxes					£
Profit, after-tax	£		£		£

Answer 1

Answer:

Profits of Chinglish Dirk and Torrington​ Edge, and the consolidated results of​ both are calculated and given below, if the markup at Chinglish was increased to​ 20% and the markup at Torrington was reduced to​ 10% in the following​ table:

The above excel with 'show formula' is as follows:

Existing tax and consolidated (based on mark up of 15% is as follows):

Impact of this repositioning:

Increase in Consolidated​ after-tax profit = 6153000 - 6079500 = £73,500

Decrease in Consolidated total tax​ payments =1885500 - 1677000 = £ 208,500

Hence:

Impact of this repositioning:

Increase in Consolidated​ after-tax profit = £73,500

Decrease in Consolidated total tax​ payments = £ 208,500