December 2009 ACCA P5 Paper-International Transfer Price – Tax issue

Question (b)
After considerable internal discussion concerning Quotation 2 by the management of SSA Group, Division A is not prepared to supply 18,000 ankle supports to Division B at any price lower than 30% below market price. All profits in Distalnd ( Division B) are subject to taxation at a rate of 20% . Division A pays tax in Nearland at a rate of 40% on all profits.
Advise the management of SSA Group whether the management of Division B should be directed to purchase the ankle supports from Division A or to purchase a similar product from local supplier at 9 per unit in distaland.Supporting calculations to be provideded ( 8 marks)

Answer
Now there are 2 scenarios either
1)B should buy at 10.50 per unit from A or
2) B should buy at 9 per unit from Market in its own country
1)Option 1
Since tax rates in A’s country are at 40% and B’s country at 20% . It does not make sense for A to charge 10.50 per unit to B especially when the same quality product is available in B’s country at 9 per unit thereby allowing to make more profit to A and paying tax at 40% on it.
10.50 X 18000 units = 189,000 minus variable cost 126000= 63000 X 40% Tax =25200=Tax component
Division B after buying at 10.50 per unit will be making less profit ( and also notional loss of 9 per unit minus 10.50 per unit) as such reduced Tax liability
2)Option 2
Now Division B is buying at 9 per unit from market and then process and sell it to make profit in the market since final selling price is not given -tax liability of profit at 20% would certainly be lower.
A will not have not have any impact on profit – since B is buying from market.

As such on the basis of this analogy – Option 2 of allowing B to buy from market makes sense and logical.

Now this answer DOES NOT MATCH with ACCA answer as far as CALCULATIONS PART is concerned. However my answer choice and ACCA answer choice of allowing B to buy from market GETS MATCHED.
Kindly advise as an EXPERT , will you give any consideration to my answer and whether it is acceptable.

My further query on such questions is
1)Whether we should be worrying about tax components or
2)Profit after Tax Components

Kindly give your comments on my answer and about 2 issues raised further.

Deep