Tech Friendly Computer, Inc., with headquarters in San Francisco, manufactures and sells a desktop computer. Tech Friendly has two divisions, each of which is located in a different country:
I.China division—assembles desktop computers using locally manufactured parts, along with memory devices and keyboards, costing $35
II.U.S. division—packages and distributes these desktop computers as well as computers supplied by another producer at $125
■ Each desktop computer is sold to retail outlets in the United States for $380
■ Chinese income tax rate on the China division’s net income: 40%
■ U.S. income tax rate on the U.S. division’s net income: 30%
1. Assuming that 1000 computers were sold in the US, calculate the net income after tax earned by each division under the following transfer pricing methods: (a) market price, (b) 200% of full cost, and (c) hybrid transfer price of $110
2. Which transfer-pricing method will maximize the net income after tax of Tech Friendly Computer?