Conner Manufacturing has one plant located in Italy and another plant located in the United States. The Italian plant manufactures a component used in a finished product manufactured at the U.S. plant. Currently, the Italian plant is operating at 75 per cent capacity. In Italy, the income tax rate is 32 per cent; in the United States, the corporate income tax rate is 35 per cent. The market price of the component is £240 and the Italian plant's costs to manufacture the component are as follows: $\begin{array}{lr}
\text { Direct materials } & £ 60 \
\text { Direct labour } & 40 \
\text { Variable overhead } & 20 \
\text { Fixed overhead } & 30
\end{array}$ Which transfer price would be in the best interest of the overall company?

Question

Quizplus · Accepted Answer

The best interest of the overall company would be to use the market price of £240 as the transfer price. This approach ensures that the Italian plant is credited with the full value of the component it produces, reflecting its market value, and supports the company in maximizing its overall profit by taking advantage of the different tax rates between the two countries.

Conner Manufacturing Has One Plant Located in Italy and Another