The following information is available for Company ABC.
(All amounts provided are in US dollars)
$\begin{array}{lll}
&\text { Manufacturing Affiliate } & \text { Sales Affiliate } \
&\text { (Canada, income tax rate: } & \text { (United States, income } \
&40 \% \text { ) } & \text { tax rate: } 30 \% \text { ) }\
\text { Sales } & \_\_\_& \$ 10,000 \
\text { Cost of goods sold } & 5,000 &\_\_\_ \
\text { Operating expenses } & 1,000 & \$ 1,000\ \text { Taxable income}\ \text { Income taxes}\ \text {Net income }\
\end{array}$
-If Canada changes its corporate income tax to 35%,does the optimum transfer price change?

Question

Quizplus · Accepted Answer

The optimum transfer price is determined by the marginal cost to the company as a whole and strategic considerations such as minimizing global taxes, not just the tax rate of one affiliate. Since the information provided does not include details on how the transfer price was initially set or the specific strategy for setting transfer prices (e.g., cost-based, market-based, negotiated), we cannot determine that a change in the Canadian tax rate alone would alter the optimum transfer price.

The Following Information Is Available for Company ABC -If Canada Changes Its Corporate Income Tax to 35%,does the Provided