MIDTERM ACCT 4625

2.
a. All three of Trump Companies Subsidiaries are Profit centers because they each have control over their costs and profits.
b. For the $50,000 bonuses, the Trump Company decided that it would be in the company’s best interest to divide it up based on before tax profit for each subsidiary. This way each subsidiary will have an incentive to gain more profit for the company.
2013 New York London Vulcan City
Sales (Units) 10,000 20,000 25,000
Selling Price $14.00 $11.00 $9.00
Cost of Production $4.00 $6.00 $7.00
Capacity 20,000 30,000 35,000
Tax Rate 20% 10% 35%
EBT $100,000.00 $100,000.00 $50,000.00
Profit after Tax $80,000.00 $90,000.00 $32,500.00
% of EBT 40% 40% 20%
Bonuse (50K) $20,000.00 $20,000.00 $10,000.00

c) Instead of manufacturing the 8000 calculators promised to the Vulcan Government in house, Vulcan City will contract the work out to another subsidiary: the New York Division. The New York Division will sell the additional 8000 calculators to Vulcan City at the cost of $8.75 (since there is no transfer maximum listed we are assuming we can charge the full amount) for every calculator. The reasons for this arrangement are:
1. The New York has the available idle capacity, so they aren’t being hurt by selling them at a lower than normal selling price.
2. By this arrangement Trump Company will save on taxes by only paying 20% on $70,000 of the calculators instead of Vulcan City paying 35% on $70,000. Creating tax savings of $10,500.
d) For 2014 bonuses, Trump company will used the same method as 2014. Except, each company’s profits will be calculated as if the transfer had ben done at Vulcan City’s cost of production.
1. The New York has the available idle capacity, so they aren’t being hurt by selling them at a lower than normal selling price.
2. Vulcan City’s profits are the same as if they had produced