SEMO Incorporated has a division located in Spain and another in the United States. The Spanish Division produces a part needed for the product made by the U.S. Division. There is substantial excess capacity in the Spanish Division. The tax rate of the Spanish Division is 35% and U.S. Division tax rate is 30%.
The part sells externally for $75 and the Spanish division's manufacturing costs are:
$\begin{array}{llr}
\text { Direct materials } &\$32\
\text { Direct labor} &12\
\text { Variable overhead } &6\
\text {
Fixed overhead } &19\
\end{array}$

Required:
a) What would be the lowest acceptable transfer price for the Spanish division?
b) What would be the highest acceptable transfer price for the U.S. division?
c) What would be the transfer price that would be the best for SEMO Incorporated and why?

Question

SEMO Incorporated has a division located in Spain and another in the United States. The Spanish Division produces a part needed for the product made by the U.S. Division. There is substantial excess capacity in the Spanish Division. The tax rate of the Spanish Division is 35% and U.S. Division tax rate is 30%.
The part sells externally for $75 and the Spanish division's manufacturing costs are:
 $\begin{array}{llr}
  \text { Direct materials } &\$32\
 \text {  Direct labor} &12\
 \text { Variable overhead } &6\
 \text {
Fixed overhead  } &19\
\end{array}$
 
Required:
a) What would be the lowest acceptable transfer price for the Spanish division?
b) What would be the highest acceptable transfer price for the U.S. division?
c) What would be the transfer price that would be the best for SEMO Incorporated and why?

Quizplus · Accepted Answer

The Answer of SEMO Incorporated has a division located in Spain and another in the United States. The Spanish Division produces a part needed for the product made by the U.S. Division. There is substantial excess capacity in the Spanish Division. The tax rate of the Spanish Division is 35% and U.S. Division tax rate is 30%.
The part sells externally for $75 and the Spanish division's manufacturing costs are:
 $\begin{array}{llr}
  \text { Direct materials } &\$32\
 \text {  Direct labor} &12\
 \text { Variable overhead } &6\
 \text {
Fixed overhead  } &19\
\end{array}$
 
Required:
a) What would be the lowest acceptable transfer price for the Spanish division?
b) What would be the highest acceptable transfer price for the U.S. division?
c) What would be the transfer price that would be the best for SEMO Incorporated and why?

SEMO Incorporated Has a Division Located in Spain and Another