Assume that Y pays a tax deductible tariff of 7 percent on imported merchandise. Calculate the increase in annual after-tax profits if the higher transfer price of $1,250 per unit is used.

Question

Quizplus · Accepted Answer

If Y uses the higher transfer price of $1,250 per unit, there will be an additional cost of $250 per unit ($1,250 - $1,000). If Y sells 500 units, the total additional cost would be $125,000 ($250 x 500).

As the tariff is tax deductible, Y can reduce the taxable income by $87.50 ($1,250 x 7%) for each unit. Thus, the total tax savings would be $43,750 ($87.50 x 500).

The increase in after-tax profits would be the difference between the additional cost and the tax savings, which is $81,250 ($125,000 - $43,750).

Therefore, the best choice is C, $125,000.

Assume That Y Pays a Tax Deductible Tariff of 7