Case 12-1; Litchfield Corporation Essay Example | Topics and Well Written Essays - 500 words

Case 12-1; Litchfield Corporation - Essay Example This means that despite Litchfield Corporation of a favourable environment to operate in the UK, the perceived profits will decline as the margin is to be taxed by the federal government. The establishment of an offshore subsidiary firm enables the institution split its profits into two where; export profits from the sale of the umbrellas to the subsidiary which is subject to income tax while export profits from the subsidiary sales to foreign buyers is not subject to the US federal income tax unless distributed to the parent firm in the form of a dividend (Burman & Slemrod, 2013). Litchfield Corporation’s ambitious expansion certainly will have to handle and manage the risks that are associated with exportation so as to ensure maximum profitability and limits losses. The risks likely to be encountered include; Credit risk; this might affect the parent company since the credit worthiness of the offshore subsidiary may be questionable. The credit worthiness limits the risk of late payments, non-payments hence minimizes the risk of reduced profits. Transportation and logistics; the company faces the risks associated with movement of goods over long geographical locations. This increases the costs of operation since more is invested in risk transfer and profit margins are likely to be reduced. Therefore, the risks that might likely to affect the business need to be identified and proper steps undertaken so as to minimize the risk of loss of profit. Some of the risk management options include; insurance that covers country risk cover, credit risk cover, and transit risk cover ensuring that Litchfield competes profitably in UK. Cost-based; this is transfer price based on the cost of production of material. This determination is set to include a profit margin for the producer. However, the simplicity of application of the cost based transfer price method, two problems arise such as the measure of