Question

Northfield Manufacturing has two operating divisions in a semiautonomous organizational structure. Americas Division, based in the United States, produces a specialized memory chip that is an input to Asia Division, based in Japan. Americas Division uses idle capacity to produce the component, which has a domestic market price of $72. Its variable costs are $30 per unit. Northfield's U.S. tax rate is 25 percent of income. In addition to the transfer price for each component recelved from Americas, Asia Division pays an $18 per unit shipping fee. The chip becomes a part of its assembled product, which costs an additional $12 to produce and sells for an equivalent of $138. Asia could purchase the component from an Asian supplier for $60 per unit. Northfield's tax rate in Japan is 30 percent of income. Assume that Japanese tax laws permit transferring at either varlable cost or market price. Required: a-1. What are the respective profits after tax for both the Americas Division and Asia Division of Northfield Manufacturing if the transfer price is $30 ? a-2. What are the respective profits after tax for both the Americas Division and Asia Division of Northfield Manufacturing if the transfer price is $72 ? a-3. What transfer price is economically optimal for Northfield Manufacturin[??

Answer 1

The respective profits after tax for the Americas Division and Asia Division of Northfield Manufacturing depend on the transfer price set. If the transfer price is $30, both divisions would not make any profit after tax. If the transfer price is $72, the Americas Division would have a profit after tax of $42 * Quantity, while the Asia Division would have a profit after tax of ($72 - $18 + $12) * Quantity - (($72 - $18 + $12) * Quantity * 30%). The economically optimal transfer price would depend on several factors and should be set in a way that maximizes the overall profit of the company.

Step-by-step explanation:

In order to determine the respective profits after tax for both the Americas Division and Asia Division of Northfield Manufacturing, we need to calculate the profits for each division based on different transfer prices.

a-1. Transfer price set at $30:

For the Americas Division:

Total revenue = Transfer price * Quantity = $30 * Quantity

Total cost = Variable cost * Quantity = $30 * Quantity

Profit before tax = Total revenue - Total cost = $0

Profit after tax = Profit before tax - Tax = $0 - ($0 * 25%) = $0

For the Asia Division:

Total revenue = Transfer price * Quantity - Shipping fee * Quantity = $30 * Quantity - $18 * Quantity

Total cost = Variable cost * Quantity + Additional cost = $30 * Quantity + $12 * Quantity

Profit before tax = Total revenue - Total cost = ($30 - $18 + $12) * Quantity

Profit after tax = Profit before tax - Tax = ($30 - $18 + $12) * Quantity - (($30 - $18 + $12) * Quantity * 30%)

a-2. Transfer price set at $72:

For the Americas Division:

Total revenue = Transfer price * Quantity = $72 * Quantity

Total cost = Variable cost * Quantity = $30 * Quantity

Profit before tax = Total revenue - Total cost = $42 * Quantity

Profit after tax = Profit before tax - Tax = ($42 * Quantity) - (($42 * Quantity) * 25%)

For the Asia Division:

Total revenue = Transfer price * Quantity - Shipping fee * Quantity = $72 * Quantity - $18 * Quantity

Total cost = Variable cost * Quantity + Additional cost = $30 * Quantity + $12 * Quantity

Profit before tax = Total revenue - Total cost = ($72 - $18 + $12) * Quantity

Profit after tax = Profit before tax - Tax = ($72 - $18 + $12) * Quantity - (($72 - $18 + $12) * Quantity * 30%)

a-3. Economically optimal transfer price:

The economically optimal transfer price for Northfield Manufacturing would depend on various factors such as market conditions, competition, and profit objectives. It is important to consider both the profitability of each division and the overall profitability of the company. The transfer price should be set in a way that maximizes the overall profit of the company while ensuring fair compensation for each division.

Answer 2

a-1. Transfer Price = $58

- Americas Division Profit After Tax: $0

- Asia Division Profit After Tax: -$39.20

a-2. Transfer Price = $114

- Americas Division Profit After Tax: $42

- Asia Division Profit After Tax: $35

a-3. The economically optimal transfer price for Northfield Manufacturing is $58.

How did we get the values?

To calculate the respective profits after tax for both the Americas Division and Asia Division of Northfield Manufacturing, we need to consider the transfer price and relevant costs. Let's calculate the profits for different scenarios:

Scenario a-1: Transfer Price = $58

Americas Division:

- Revenue: $58 (transfer price)

- Variable Costs: $58

- Taxable Income: $58 - $58 = $0

- Tax (25%): $0

- Profit After Tax: $0

Asia Division:

- Revenue: $0 (no external sales, as all components are used internally)

- Variable Costs: $0

- Shipping Fee: $60

- Additional Production Costs: $54

- Taxable Income: $58 - $60 - $54 = -$56

- Tax (30%): -$56 * 30% = -$16.80

- Profit After Tax: -$39.20

Scenario a-2: Transfer Price = $114

Americas Division:

- Revenue: $114 (transfer price)

- Variable Costs: $58

- Taxable Income: $114 - $58 = $56

- Tax (25%): $56 * 25% = $14

- Profit After Tax: $56 - $14 = $42

Asia Division:

- Revenue: $278 (selling price of the assembled product)

- Variable Costs: $114 (transfer price) + $60 (shipping fee) + $54 (additional production costs) = $228

- Taxable Income: $278 - $228 = $50

- Tax (30%): $50 * 30% = $15

- Profit After Tax: $278 - $228 - $15 = $35

Scenario a-3: Economically Optimal Transfer Price: To find the economically optimal transfer price, we need to maximize the overall profit for Northfield Manufacturing. It's essential to balance the profit in both divisions. The optimal transfer price is usually the one that equals the variable cost of the selling division. In this case, it is $58.

Let's summarize the results:

| Transfer Price | Americas Division Profit | Asia Division Profit |

| -------------------- | ----------------------------------- | --------------------- |

| $58 | $0 | -$39.20 |

| $114 | $42 | $35 |

Therefore, the economically optimal transfer price for Northfield Manufacturing is $58.