Question

and 19 Homework (Managerial) Saved Zen Manufacturing Inc. is a multinational firm with sales and manufacturing units in 15 countries. One of its manufacturing units, in country X, sells its product to a retail unit in country Y for $332,000. The unit in country X has manufacturing costs of $170,000 for these products. The retail unit in country Y sells the product to final customers for $470.000. Zen is considering adjusting its transfer prices to reduce overall corporate tax liability. Required: 1. Assume that both country X and country Y have corporate income tax rates of 40% and that no special tax treaties or benefits apply to Zen What would be the effect on Zen's total tax burden if the manufacturing unit raises its price from $332,000 to $398.4002 2. What would be the effect on Zen's total taxes if the manufacturing unit raised its price from $332,000 to $398,400 and the tax rates In countries X and Yare 20% and 40%, respectively? (For all requirements, leave no cell blank; if there is no effect enter "O" and select "No effect" from dropdown.) 1. Effect on Zen's total tax when tax rates are same in both the countries 2. Effect on Zen's total tax when tax rates are different in countries X and Y < Prev 2 of 2 !!! Next arch o e e

Answer 1

Zen
	X	Y	Total
Selling Price	332,000	470,000
Cost	170,000	332,000
Profit	162,000	138,000
Tax Rate	40%	40%
Tax Liability	64,800	55,200	120,000
After raising price
	X	Y	Total
Selling Price	398,400	470,000
Cost	170,000	398,400
Profit	228,400	71,600
Tax Rate	40%	40%
Tax Liability	91,360	28,640	120,000
No effect as tax rates are same
2.
Original
	X	Y	Total
Selling Price	332,000	470,000
Cost	170,000	332,000
Profit	162,000	138,000
Tax Rate	20%	40%
Tax Liability	32,400	55,200	87,600
After raising price
	X	Y	Total
Selling Price	398,400	470,000
Cost	170,000	398,400
Profit	228,400	71,600
Tax Rate	20%	40%
Tax Liability	45,680	28,640	74,320
Decrease in tax liability by 13,280