North Italy Mining Division
Division revenues, $345, $370
12,000
Costs
Division variable costs, $90 12,000
Division fixed costs, $140 12,000
Total division costs
Division operating income
U.S. Processing Division
Division revenues, $1,150 6,000
Costs
Transferred-in costs, $345, $370 12,000
Division variable cost, $48 6,000
Division fixed costs, $120 6,000
Total division costs
Division operating income
$4,140,000
1,080,000
1,680,000
2,760,000
$1,380,000
$6,900,000
4,140,000
288,000
720,000
5,148,000
$1,752,000
$4,440,000
1,080,000
1,680,000
2,760,000
$1,680,000
$6,900,000
4,440,000
288,000
720,000
5,448,000
$1,452,000
U.S. Processing Division
Division operating income
Income tax at 35%
Division after-tax operating income
$1,752,000
613,200
$1,138,800
$1,452,000
508,200
$ 943,800
3.
150% of
Full Cost
Market
Price
North Italy Mining Division:
After-tax operating income
U.S. Processing Division:
After-tax operating income
Supergrow:
After-tax operating income
$ 966,000
1,138,800
$2,104,800
$1,176,000
943,800
$2,119,800
The North Italy Mining Division manager will prefer the higher transfer price of market price, and
the U.S. Processing Division manager will prefer the lower transfer price equal to 150% of full
cost. Supergrow will maximize companywide net income by using the market price-based
transfer-pricing method. This method sources more of the total income in Italy, the country with
the lower income tax rate.
4. Factors that executives consider important in transfer pricing decisions include the
following:
a. Performance evaluation
b. Management motivation
c. Pricing and product emphasis
