The variable cost of Part X is $50 and the full cost of the part is $80.The part is produced in Country Z and transferred to a plant in Country B.Country Z has a 30% income tax rate.Country B has a 50% income tax rate and an import duty equal to 10% of the price of the item.Part X can be transferred at full cost or variable cost.Assume that Part X is priced at full cost.The income tax effect per unit in country Z is_____.
A)an increase in tax by $9 per unit
B)a decrease in tax by $9 per unit
C)an increase in tax by $24 per unit
D)a decrease in tax by $24 per unit

Question

Quizplus · Accepted Answer

The full cost of Part X is $80, which includes the variable cost of $50. Thus, the fixed costs are $30 per unit (80-50).
If the part is transferred at full cost, the income of the transferring country (Country Z) is equal to its full cost which is $80. Therefore, the income tax in Country Z is 30% of $80 which is $24 per unit (80*0.3).
If the part is transferred at variable cost, the income of the transferring country (Country Z) is equal to its variable cost which is $50. Therefore, the income tax in Country Z is 30% of $50 which is $15 per unit (50*0.3).
Hence, the income tax effect per unit in Country Z is a decrease in tax by $9 per unit ($24-$15).

The Variable Cost of Part X Is $50 and the Full