Question

Crain Company has a manufacturing subsidiary in Singapore that produces high-end exercise equipment for U.S. consumers. The manufacturing subsidiary has total manufacturing costs of $1,490,000, plus general and administrative expenses of $349,000. The manufacturing unit sells the equipment for $2,490,000 to the U.S. marketing subsidiary, which sells it to the final consumer for an aggregate of $3,490,000. The sales subsidiary has total marketing, general, and administrative costs of $199,000. Assume that Singapore has a corporate tax rate of 33% and that the U.S. tax rate is 46%. Assume that no tax treaties or other special tax treatments apply.
What is the effect on Crain Company’s total corporate-level taxes if the manufacturing subsidiary raises its price to the sales subsidiary by 20%?

Answer 1

Answer:

Crain Company's total taxes would decrease by $64,740

Explanation:

the income statement for the parent company:

total revenue $2,490,000

- COGS          ($1,490,000)

- S&A costs     ($390,000)

EBIT                   $610,000

- taxes              ($201,300)

net income       $408,700

the income statement for the subsidiary:

total revenue $3,490,000

- COGS          ($2,490,000)

- S&A costs      ($199,000)

EBIT                   $801,000

- taxes              ($368,460)

net income       $432,540

total taxes paid = $201,300 + $368,460 = $569,760

if the parent company increases the selling price by 20%

the income statement for the parent company:

total revenue $2,988,000

- COGS          ($1,490,000)

- S&A costs     ($390,000)

EBIT                 $1,108,000

- taxes              ($365,640)

net income       $742,360

the income statement for the subsidiary:

total revenue $3,490,000

- COGS          ($2,988,000)

- S&A costs       ($199,000)

EBIT                   $303,000

- taxes               ($139,380)

net income        $163,620

total taxes paid = $365,640 + $139,380 = $505,020

the parent company's total taxes would decrease by = $569,760 - 505,020 = $64,740