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Advanz enterprises has its pharmaceutical product manufacturing affiliate in the USA and its sales affiliate in Brazil. The manufacturing cost of a best-selling pharmaceutical product is $480,000 based on the operations at full capacity of 15,000 units. The US affiliate invoices its sales affiliate in Brazil for an order of 15,000 units at a profit margin of 15% of cost. The Brazilian sales affiliate resells these products to final consumers for $2,600,000. Both affiliates incur operating expenses of $390,000 each. The US affiliate incurs a cost of $22 per unit to transport the products to the selling affiliate in Brazil. The market price of the product in USA is $125 per unit. The US levies a corporate income tax of 21% and Brazil levies a corporate income tax of 15%. Brazil also levies a tariff of 12% on declared value of the imported pharmaceutical products. Import duties are deductible for income tax purposes in Brazil.
Required
Problem a) Based on the given information, formulate a transfer pricing strategy that would minimise Advanz Enterprise's overall tax burden. Show all calculations.
Problem b) Would the managers of both affiliates be pleased with the above transfer price if each affiliate's performance is measured from a profit centre perspective? Give reasons.
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