Albertas Boot division is located in a country with a corpor

Alberta\'s Boot division is located in a country with a corporate tax of 10% and the Sole division of Alberta Company is located in a country with a tax rate of 30%. What conclusion can you make after analyzing the data in Figure 8b-1? There, the tax margins of a company are compared using a transfer price per unit of $18.00 versus a transfer price per unit of $11.00 (Weygandt, Kimmel, & Kieso, 2015, p. 337).

$18 Transfer Price Boot Divisiorn Sole Division $90.00 Selling price of sole Selling price of hiking boots Variable cost of manufacturing $18.00 11.00 35.00 Viable cost per sole boot (not including sole) Cost of sole purchased internally 18.00 Before-tax contribution margin 37.00 Before-tax contribution margin 7.00 Tax at 10% After-tax contribution margin$33.30 After-tax contribution margin 4.90 3.70 Tax at 30% 2.10 Before-tax total contribution margin per unit to company = $37 + $7 = $44 After-tax total contribution margin per unit to company - $33.30 + $4.90 $38.20 $11 Transfer Price Boot Divisiorn Sole Division $90.00 Selling price of sole Selling price of hiking boots Variable cost of manufacturing $11.00 11.00 5.00 Variable cost per sole boot (not including sole) Cost of sole purchased internally 11.00 Before-tax contribution margin 44.00 Before-tax contribution margin Tax at 10% After-tax contribution margin$39.60 After-tax contribution margin 0.00 0.00 0.00 4.40 Tax at 30% Before-tax total contribution margin per unit to company = $44 + $0= $44 After-tax total contribution margin per unit to company $39.60$0- $39.60

Solution

After analyzing the data in Figure 8b-1, we conclude this-

Before tax total contribution margin of Alberta Company is $44 regardless of whether the transger price is $18 or $10.

However, the after tax contribution magin of Alberta Company $38.20. This is because when Alberta uses the$11 transfer price more of the contribution margin is attributed to the division that is in the country with the lower tax rate, so it pays $1.40 less per unit in taxes

this shows Alberta Company would be better off using the $11 transfer price. However there are two concerns here-

first, Sole division manager will not be happy with transfer price $11

second, company must ask whether it is legal to use $11 transfer price when market price is higher than that.