Subsidiary X,located in a country with a 25% corporate income tax rate,and Subsidiary Y,located in a country with a 35% corporate income tax rate are part of a decentralized organization. They have been engaged in trade with one another using a negotiated transfer price of $50 per unit for sales by Subsidiary X to Subsidiary Y. Pipko,the parent company of both Subsidiary X and Subsidiary Y recently set a discretionary transfer price of $80 per unit for the transfers between X and Y. How will subsidiary managers in the decentralized organization view this decision by parent company management?

Question

Quizplus · Accepted Answer

The manager of Subsidiary Y will be concerned about the decline in Y's profit and the effect this will have on his/her bonus, as the decreased profit will have a negative impact on their performance evaluation and potential incentives. The manager of Subsidiary X may not be as concerned, as their profit will increase due to the higher transfer price set by the parent company. Other managers in the decentralized organization may have varying opinions, but B is the most likely reaction of Subsidiary Y manager.

Subsidiary X,located in a Country with a 25% Corporate Income