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Scenario 1a (16 marks): Multinational transfer pricing, global tax minimisation Derwent Ltd manufactures telecommunications equipment at its plant in Geelong. The company has marketing divisions...

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Scenario 1a (16 marks):

Multinational transfer pricing, global tax minimisation

Derwent Ltd manufactures telecommunications equipment at its plant in Geelong. The company has marketing divisions throughout the world. A Derwent Ltd marketing division in Dallas, USA, imports XXXXXXXXXXunits of product B12 from Australia. The following information is available:

Australian income tax rate on the Australian division’s operating profit


US income tax rate on the US division’s operating profit


US import duty


Variable manufacturing cost per unit of product B12


Full manufacturing cost per unit of product B12


Selling price (net of marketing and distribution costs) in the United States


Suppose that the Australian and US tax authorities only allow transfer prices that are between the full manufacturing cost per unit of $800 and a market price of $950, based on comparable imports into the USA. The US import duty is charged on the price at which the product is transferred into the USA. Any import duty paid to the US authorities is a deductible expense for calculating US income taxes due.


1. Calculate the after-tax operating profit earned by the Australian and US divisions from transferring XXXXXXXXXXunits of product B12: (a) at full manufacturing cost per unit and (b) at market price of comparable imports. (Income taxes are not included in the calculation of the cost-based transfer prices.)(12 marks)

2. Which transfer price should Derwent Ltd select to minimise the total of company import duties and income taxes? Remember that the transfer price must be between the full manufacturing cost per unit of $800 and the market price of $950 of comparable imports into the USA. Explain your reasoning.(4 marks)

Scenario 1b (23 Marks):

Multinational transfer pricing, goal congruence (continuation of Scenario 1a)

Suppose that the Australian division could sell as many units of product B12 as it makes at $900 per unit in the US market, net of all marketing and distribution costs.


1. From the viewpoint of Derwent Ltd as a whole, would after-tax operating profit be maximised if it sold the XXXXXXXXXXunits of product B12 in Australia or in the USA? Show your calculations.(5 marks)

2. Suppose that division managers act autonomously to maximise their division’s after-tax operating profit. Will the transfer price calculated in requirement 2 of Scenario 1a) result in the Australian division manager taking the actions determined to be optimal in requirement 1 of this exercise? Explain.(3 marks)

3. What is the minimum transfer price that the Australian division manager would agree to? Does this transfer price result in Derwent Ltd as a whole paying more import duty and taxes than in the answer to requirement 2 of Scenario 1a)? If so, by how much?(15 marks)

Scenario 2 (15 Marks):

Airline pricing

The management of Eastcoast Airways is thinking about introducing a daily return-flight from Melbourne to the Gold Coast. You are the management accountant at Eastcoast Airways and are working with the marketing manager to recommend the price for a return ticket.

In researching the market, you and the marketing manager:

(1) Establish potential demand for the planned flight

(2) Distinguish between business and pleasure travellers (pleasure travellers start their travel during one week, spend at least one weekend at their destination and return the following week or thereafter; business travellers usually start and complete their travel within the same work week, i.e. they do not stay over weekends)

(3) Estimate the effects of two different prices on the number of seats expected to be sold and the variable cost per ticket (see table below)

(4) Estimate from the records of similar flights that the fuel costs are likely to amount to $18 500

(5) Allocate a total of $ XXXXXXXXXXto the return flight in respect of aircraft-lease costs, ground services and flight-crew salaries.

You present this information to the management team for discussion at the next management meeting.

Max Number of seats Available (Number of seats expected to be sold at price charged)

Price charged

Variable cost per ticket










25 (20)


Write a report to management recommending that they charge a single price or different prices to business travellers and pleasure travellers.

For the second option, recommend a way in which Eastcoast Airways might implement price discrimination, to ensure that business travellers and pleasure travellers each pay the price the airline seeks to charge. Support your recommendation with clear explanations and relevant calculations.

(15 marks total)

Answered Same Day May 10, 2020 ACC202 Alphacrucis College


Pulkit answered on May 17 2020
138 Votes
Report to Management of Eastcoast Airways-
The company should not charge single of price from both the classes of the management of the company. The basic reason behind this is the number of seats available in case of Pleasure travellers when higher price is charged.
    Contribution per seat-
    Price Charged
     $ 600.00
     $ 1,350.00
     - Variable Cost
     $ 65.00
     $ 150.00
    Contribution per seat
     $ 535.00
     $ 1,200.00
     $ 600.00
     $ 1,350.00
     $ 600.00
     $ 1,350.00

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