Scenario: Subsidiary X sells 10,000 units to Subsidiary Y annually. The marginal income tax rate for Subsidiary X is 30% and the marginal income tax rate for Subsidiary Y is 45%. The transfer price...

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Scenario:
Subsidiary X sells 10,000 units to Subsidiary Y annually. The marginal income tax rate for Subsidiary X is 30% and the marginal income tax rate for Subsidiary Y is 45%. The transfer price per unit is currently $5,000, but it is likely to adjust at any level between $5,000 and $5,500.



Your Task:
Derive a formula to determine the increase in the annual after-tax profits by selecting the optimal transfer price. Then, calculate, to adjust, the optimal transfer price.



Answered Same DayDec 21, 2021

Answer To: Scenario: Subsidiary X sells 10,000 units to Subsidiary Y annually. The marginal income tax rate for...

Robert answered on Dec 21 2021
123 Votes
Optimal transfer price is the one which would yield maximum annual after tax profits, given the
qu
antity & tax rates.
Let Mx = Marginal tax rate of Subsidiary X
My = Marginal tax rate of Subsidiary Y
Q = Quantity
Pc = Current transfer price
Po = Optimal transfer price
Equation for...
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