Question

E22-20

People Able Computer, Inc., with headquarters in San​ Francisco, manufactures and sells a desktop computer. People Able has three divisions each of which is located in a different country. Each division is run as a profit center. Information on each division​ follows:

The costs for the work done in each division for a single desktop computer are as​ follows:

China division:		Variable cost	=	900 yuan
		Fixed cost	=	1,500 yuan
South Korea division:		Variable cost	=	286,000 won
		Fixed cost	=	407,000 won
U.S. division		Variable cost	=	$200
		Fixed cost	=	$240
times•	Chinese income tax rate on the China​ division's operating​ income: 40​%
times•	South Korean income tax rate on the South Korea​ division's operating​ income: 20​%
times•	U.S. income tax rate on the U.S.​ division's operating​ income: 40​%

Each desktop computer is sold to retail outlets in the United States for $2,800.

Assume that the current foreign exchange rates are as​ follows:

6 yuan	​=	​$1 U.S.
1,100 won	​=	​$1 U.S.

Both the China and the South Korea divisions sell part of their production under a private label. The China division sells the comparable​ memory/keyboard package used in each People Able desktop computer to a Chinese manufacturer for 3,000 yuan. The South Korea division sells the comparable desktop computer to a South Korean distributor for 1,540,000 won

Requirements

1.	Calculate the​ after-tax operating income per unit earned by each division under the following​ transfer-pricing methods:​ (a) market​ price, (b) 150​% of full​ cost, and​ (c) 300​% of variable cost.​ (Income taxes are not included in the computation of the​ cost-based transfer​ prices.)
2.	Which​ transfer-pricing method(s) will maximize the​ after-tax operating income per unit of People Able Computer?

Answer 1

Sumary note

So as per above analysis Market price giving higher contribution

Also Note - I have not consider any transfer ( inter ) while genrating operating profit at division level