Machine Tools Company (MTC) operates two divisions. The manufacturing division (Division M) is responsible for...
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Machine Tools Company (MTC) operates two divisions. The manufacturing division (Division M) is responsible for the manufacturing of Component X. The assembly division (Division A) uses component X to manufacture a tool called Tool-it that is used in the construction industries. The following information has been extracted for both divisions:
Selling price
Variable cost - Component X
Additional variable cost
Variable selling and administration expenses Contribution per unit
Capacity (units)
Division M N$
900 (330) - (120) 450
10 000
Division A N$
2 250
(330) (1 275) (225) 420
8 000
Division M is able to sell Component X to the external market. The external market can buy up to 5 000 components. The demand for the Tool-it is limited to 10 000 units. The variable selling and administration expense is not incurred on units transferred to Division A.
Required
Total
Taxation is major issue in international transfer pricing. Explain how transfer prices should be set to comply with guidelines that were set to avoid tax disputes.
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