Melon Computer Company manufacturers its computer components in Singapore and assembles the computers intended for sale in North America in its plant in Arizona. If the U.S. reduces the corporate income tax rate next year, what is the likely outcome for Melon Computer Company?
A) Reduce the transfer price for computer components and increase downstream profits
B) Reduce the transfer price for computer components and decrease downstream profits
C) Increase the transfer price for computer components and increase downstream profits
D) Increase the transfer price for computer components and decrease downstream profits

Question

Quizplus · Accepted Answer

Reducing the corporate income tax rate in the U.S. would likely make Melon Computer Company adjust its transfer pricing to reduce the transfer price for components. This would shift more profit to the U.S. (where the tax rate is now lower), thereby increasing downstream profits from the assembly and sale of computers in North America.

Melon Computer Company Manufacturers Its Computer Components in Singapore and Assembles