Reference no: EM132674628
Suppose that affiliate A produces 150,000 handbags for $20 apiece and sells them to affiliate B. Affiliate B, in turn, sells these handbags for $50 apiece to an unrelated customer. The tax rate in A's country is 30% and B's country is 40%.
A's costs are $3,000,000 and a typical manufacturer mark-up is 50%. B's selling price is $7,500,000 to unrelated customers, B's incremental costs are $2,000,000. Typical distributor fees are 20% times their local costs. Independent parties sell similar products to subsidiaries at $4,800,000
a) What transfer price per handbag should A establish to sell the handbags to B? Justify your answer using typical transfer price methods.
b) If A had contemplated $28 a handbag prior to your analysis, what is the impact on consolidated profits given your recommendation in a.
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