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Ch 22. Transfer Pricing Wagonco has two divisions:  Wheels and Wagons.  Each wagon needs four wheels.  Fixed costs =...

Ch 22. Transfer Pricing

Wagonco has two divisions:  Wheels and Wagons.  Each wagon needs four wheels.  Fixed costs = 0.

Wheels

Wagons

Sales/Market Price

$5 per wheel

$50 per wagon

VC

$3  per wheel

$22.50 per wagon, not including the cost of wheels (four wheels per wagon)

Items sold to outside market

2,250 wheels per month

800 per month

Capacity

5,000 wheels per month

800 per month

1. If there were no tax implications, what range of transfer prices would instill goal congruence?

2. If the Wheel division is in Canada, where the marginal tax rate is 23%, and the Wagon division is in the U.S., where the marginal tax rate is 34%, what transfer price (within the range you identified in #1) will the company prefer?  

3. Calculate the tax savings to the company if it uses the transfer price you calculated in #3 instead of the transfer price at the opposite end of the range you calculated in #1.

The company will want to move (legally—using a TP within the range) income to the lowest-tax country

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