Problem - 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 imports 10000 units of product B12 from Australia. The following information is available:

Australian income tax rate on the Australian division's operating profit 35%

US income tax rate on the US division's operating profit 40%

US import duty 15%

Variable manufacturing cost per unit of product B12 $550

Full manufacturing cost per unit of product B12 $800

Selling price (net of marketing and distribution costs) in the United States $1150

Suppose 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 United States. The US import duty is charged on the price at which the product is transferred into the United States. Any import duty paid to the US authorities is a deductible expense for calculating US income taxes due.

Required

1. Calculate the after-tax operating profit earned by the Australian and US divisions from transferring 10000 units 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.)

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?