Bobo,Inc.manufactures small motors used in refrigerators,washing machines,and other household appliances in JuJu division.JuJu division is located in a country with a 30% income tax rate.JuJu transfers the motors to LaSalle division which is located in a country with a 40% income tax rate.The variable cost per motor is $560 and LaSalle sells each motor for $960.Bobo,Inc.'s full cost per motor is $800.Should the transfer be priced at variable cost or full cost,and why?

Question

Quizplus · Accepted Answer

Pricing the transfer at full cost results in higher total firm net income due to the difference in tax rates between the two countries. By transferring at full cost, the income reported in the higher tax country is reduced, leading to overall tax savings for the company.

Bobo,IncManufactures Small Motors Used in Refrigerators,washing Machines,and Other Household Appliances