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Atascadero Industries operates a Manufacturing Division and a Marketing Division. Both divisions are evaluated as...

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Accounting

Atascadero Industries operates a Manufacturing Division and a Marketing Division. Both divisions are evaluated as profit centers. Marketing buys products from Manufacturing and packages them for sale. Manufacturing sells many components to third parties in addition to Marketing. Selected data from the two operations follow:

Manufacturing Marketing
Capacity (units) 1,070,000 507,000
Sales pricea $ 1,750 $ 4,900
Variable costsb $ 630 $ 1,820
Fixed costs $ 10,700,000 $ 7,270,000

a For Manufacturing, this is the price to third parties.

b For Marketing, this does not include the transfer price paid to Manufacturing.

Suppose Manufacturing is located in Country X with a tax rate of 60 percent and Marketing in Country Y with a tax rate of 40 percent. All other facts remain the same.

Required:

a. Current production levels in Manufacturing are 570,000 units. Marketing requests an additional 170,000 units to produce a special order. What transfer price would you recommend?

b. Suppose Manufacturing is operating at full capacity. What transfer price would you recommend?

c. Suppose Manufacturing is operating at 927,000 units. What transfer price would you recommend?

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