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 likely be concerned about the discretionary transfer price of $80 per unit as it decreases the profit margin for Subsidiary Y in the transaction. This could ultimately affect the manager's bonus and performance evaluation. Subsidiary X may not be as concerned as their profit margin has increased. The other choices are not accurate as the subsidiaries do have autonomy in decision-making and the decision by the parent company will have an impact on their profitability.

Subsidiary X, Located in a Country with a 25% Corporate