Delta Telecom Inc, which produces telecommunication equipment in the United States, has a very strong local market for its circuit board. The variable production cost is $390, and the company can sell its entire supply domestically for $510. The U.S. tax rate is 40 percent.
Alternatively, Delta Telecom can ship the circuit board to its division in Germany, to be used in a product that the German division will distribute throughout Europe. Information about the German product and the division's operating environment follows:
Selling price final product: $1,080
Shipping fees to import circuit board: $60
Labor, overhead, and additional material costs of final product. $345
Import duties levied on circuit board (to paid by German division): 10% of transfer price
German tax rate: 60%
Assume that the U.S. and German tax authorities allow transfer price for circuit board set at either U.S. variable manufacturing cost or the U.S. market price. Delta Telecom's management is in the process of exploring which transfer price is best for the firm as a whole.
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