Comparison Between Income Tax Expenses And Import Duty
- December 21, 2023/ Uncategorized
Revenue and Costs of Austrian and U.S. Divisions
Discuss about the Comparison between Income Tax Expenses and the Import Duty.
|
Austrian Division |
|
|
Revenue |
$ 8,000,000.00 |
|
Division Costs |
$ 8,000,000.00 |
|
Division operating income |
$ – |
|
Income tax @35% |
$ – |
|
Division after-tax operating income |
$ – |
|
U.S. Division |
|
|
Revenue |
$ 11,500,000.00 |
|
Division Costs |
|
|
Transferred-in cost |
$ 8,000,000.00 |
|
Import duty @15% |
$ 1,200,000.00 |
|
Division Costs |
$ 9,200,000.00 |
|
Division operating income |
$ 2,300,000.00 |
|
Income tax @40% |
$ 920,000.00 |
|
Division after-tax operating income |
$ 1,380,000.00 |
|
Total operating income of the company |
$ 1,380,000.00 |
|
Austrian Division |
|
|
Revenue |
$ 9,500,000.00 |
|
Division Costs |
$ 8,000,000.00 |
|
Division operating income |
$ 1,500,000.00 |
|
Income tax @35% |
$ 525,000.00 |
|
Division after-tax operating income |
$ 975,000.00 |
|
U.S. Division |
|
|
Revenue |
$ 11,500,000.00 |
|
Division Costs |
|
|
Transferred-in cost |
$ 9,500,000.00 |
|
Import duty @15% |
$ 1,425,000.00 |
|
Division Costs |
$ 10,925,000.00 |
|
Division operating income |
$ 575,000.00 |
|
Income tax @40% |
$ 230,000.00 |
|
Division after-tax operating income |
$ 345,000.00 |
|
Total operating income of the company |
$ 1,320,000.00 |
Requirement 2
There are various ways to make a decision. However, the important thing in the determination of transfer price has put a price which is able to enhance company’s profit. This could happen to choose a transfer price on which import duty and income tax expenses will be minimized.
At $1 increase in transfer price in addition to full manufacturing cost, net impact on import duty and income tax expenses will be,
|
Austrian Income tax @35% increase |
$ 0.35 |
|
U.S. Import duty @ 15% increase |
$ 0.15 |
|
$ 0.50 |
|
|
U.S. Income tax @40% decrease (1.15*.4) |
$ (0.46) |
|
Net impact on import duty and income tax expenses |
$ 0.04 |
Hence every $1 increase in transfer price in addition to full manufacturing cost, import duty, and income tax expenses will increase by $0.04. In the above case when the company put transfer price at $950 for 10000 units then net increase over full manufacturing cost will be $1,500,000 i.e. ((950-800)*10000) and in turn, import duty and income tax expenses will enhance by $60,000 i.e. $1,500,000*$.04.
Hence it can be concluded that company should put transfer price at full manufacturing cost i.e. $800 per unit.
|
Revenue |
$ 9,000,000.00 |
|
Full manufacturing cost |
$ 8,000,000.00 |
|
Division operating income |
$ 1,000,000.00 |
|
Income tax @35% |
$ 350,000.00 |
|
Division after-tax operating income |
$ 650,000.00 |
|
Revenue |
$ 11,500,000.00 |
|
Division Costs |
|
|
Transferred-in cost |
$ 8,000,000.00 |
|
Import duty @15% |
$ 1,200,000.00 |
|
Division Costs |
$ 9,200,000.00 |
|
Division operating income |
$ 2,300,000.00 |
|
Income tax @40% |
$ 920,000.00 |
|
Division after-tax operating income |
$ 1,380,000.00 |
Net income under option 2 is higher hence company should make the sale of 10000 units in the US.
As per conclusion made above, if product B12 transferred at the full manufacturing cost of the Australian Division then import duties and taxes expenses of the organization can be minimized. However, this transfer price will result in zero operating income for Australian Division.
In addition to this, if both divisional managers will act autonomously then Australian Division can make a profit of $650000 by selling product B12 at price of $900 in place of selling B12 in US market by transferring B12 at full cost transfer price.
Hence if both managers will act autonomously then transfer price calculated above will not be taking action by the Australian Division manager.
Minimum transfer price for Australian Division
|
Variable cost |
$ 550.00 |
|
Opportunity cost |
$ 350.00 |
|
Minimum transfer price |
$ 900.00 |
This transfer price will result in the increase in import duty and income tax expenses. As concluded from the requirement 2 of scenario 1b, every $1 increase in transfer price in addition of full manufacturing cost i.e. $800 will result in increase in import duty and income tax expenses by $0.04. Hence this transfer price i.e. $900 will result in increase in duty by $40000 i.e. ($.04*10000*(900-800)).
At Transfer price $900
|
Austrian Division |
|
|
Revenue |
$ 9,000,000.00 |
|
Full manufacturing cost |
$ 8,000,000.00 |
|
Division operating income |
$ 1,000,000.00 |
|
Income tax @35% |
$ 350,000.00 |
|
Division after-tax operating income |
$ 650,000.00 |
|
U.S. Division |
|
|
Revenue |
$ 11,500,000.00 |
|
Division Costs |
|
|
Transferred-in cost |
$ 9,000,000.00 |
|
Import duty @15% |
$ 1,350,000.00 |
|
Division Costs |
$ 10,350,000.00 |
|
Division operating income |
$ 1,150,000.00 |
|
Income tax @40% |
$ 460,000.00 |
|
Division after-tax operating income |
$ 690,000.00 |
|
Transfer price |
$800 |
$900 |
|
Austrian Income tax @35% increase |
$ – |
$ 350,000.00 |
|
U.S. Import duty @ 15% increase |
$ 1,200,000.00 |
$ 1,350,000.00 |
|
U.S. Income tax @40% |
$ 920,000.00 |
$ 460,000.00 |
|
Total Income tax expenses and import duty |
$ 2,120,000.00 |
$ 2,160,000.00 |
|
Net increase |
$ 40,000.00 |
Price discrimination refers to the policy of the organization in which organization charges a different price for the same good or services to the different customer. This report is written to the management of the Eastcoast Airways for recommending them regarding the sale price for the different class of customers.
In the present case available sale prices are $600 or $1350, the contribution margin for each sale price will be,
|
Price charged |
$ 600.00 |
$ 1,350.00 |
|
Variable cost |
$ 65.00 |
$ 150.00 |
|
Contribution margin |
$ 535.00 |
$ 1,200.00 |
This calculation of contribution margin denotes that $1350 price is more beneficial for the organization. However, due to change in price, demand will also change hence it is required to estimate contribution for each class at each price
|
Business class customers |
Pleasure class customers |
|||
|
Price charged |
$ 600.00 |
$1,350.00 |
$ 600.00 |
$ 1,350.00 |
|
Expected sale |
200 |
180 |
100 |
20 |
|
Contribution earned |
$ 120,000.00 |
$ 243,000.00 |
$ 60,000.00 |
$ 27,000.00 |
Above table shows that business class customers are lower price sensitive and their demand will not change highly due to change in price. On the other hand pleasure class customers are highly price sensitive and their demand will change highly due to change in price. Hence, Eastcoast Airways can earn higher contribution by charging the price of $1350 from the business class customers and $600 from pleasure class customers. This contribution margin does not consider fuel costs and other flight run cost because these costs are irrelevant to the decision.
Since business travelers returns in the same week, however, pleasure travelers stay on the weekends hence organization can put a discount for the customers stay on Saturday night for $750. This discount will be availed by every customer. However only pleasure customers will stay Saturday night hence there price will be $600 and for business customers, the price will remain $1350.
Therefore the recommended price charging policy for the organization is,
Flat price for every customer is $1350 and the customers who will stay at Saturday night will receive a discount of $750 per seat. In this way, their net price will be $600.
In this way, the organization will get higher earnings.
