Affiliate X sells 10,000 units to Affiliate Y per year.The marginal tax rates for X and Y,respectively,are 20 percent and 30 percent.The transfer price per unit is currently set at $1,000,but it can go as high as $1,250. Calculate the increase in annual after-tax profits if the higher transfer price of $1,250 per unit is used.

Question

Quizplus · Accepted Answer

The increase in annual after-tax profits is $250,000. This is calculated as follows:Increase in transfer price per unit = $1,250 - $1,000 = $250Increase in total transfer price = $250 * 10,000 units = $2,500,000Increase in after-tax profits for Affiliate X = $2,500,000 * (1 - 0.20) = $2,000,000Increase in after-tax profits for Affiliate Y = $2,500,000 * (1 - 0.30) = $1,750,000Total increase in after-tax profits = $2,000,000 + $1,750,000 = $3,750,000However, since Affiliate X is the seller, the increase in after-tax profits for Affiliate X is the only relevant amount. Therefore, the increase in annual after-tax profits is $2,000,000.

Affiliate X Sells 10,000 Units to Affiliate Y Per Year