Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 12

Transfer Pricing; Ethics Zen Manufacturing, Inc., is a multinational firm with sales and manufacturing units in 15 countries. One of its manufacturing units, in country X, sells its product to a retail unit in country Y for $300,000. The unit in country X has manufacturing costs of $150,000 for these products. The retail unit in country Y sells the product to final customers for $450,000. Zen is considering adjusting its transfer prices to reduce overall corporate tax liability.
Required
1. Assume that both country X and country Y have corporate income tax rates of 40% and that no special tax treaties or benefits apply to Zen. What would be the effect on Zen's total tax burden if the manufacturing unit raises its price from $300,000 to $360,000
2. What would be the effect on Zen's total taxes if the manufacturing unit raised its price from $300,000 to $360,000 and the tax rates in country X and country Y are 20% and 40%, respectively
3. Comment on any ethical issues you observe in this case.