Posted: November 26th, 2015

Transfer Pricing Decisions

Transfer Pricing Decisions

Phipps manufactures circuit boards in Division A, a country with a 30% income tax

rate, and transfers them to Division B, a country with a 40% income tax. An import

duty of 15% of the transfer price is paid on all imported products. The import duty

is not deductible in computing taxable income. The circuit boards’ full cost is

$1,000 and variable cost is $700; they are sold by Division B for $1,200. The tax

authorities in both countries allow firms to use either variable cost or full cost

as the transfer price.

The Assignment:

Part 1: Analyze the effect of both full-cost and variable-cost transfer pricing

methods on Phipps’ cash flows using a spreadsheet program such as Excel.
Part 2: Make your recommendation as to how the organization should proceed, being

sure to justify your recommendation with examples form this week’s resources,

and/or additional research. Complete this aspect of the Assignment by using a word

processing program such as Word.

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