Affiliate A sells a million units to Affiliate B per year.The marginal income tax rate for Affiliate A is 20 percent and the marginal income tax rate for Affiliate B is 50 percent.The transfer price can be set at any level between $100 and $200.Which transfer price between A and B should the parent select?

Question

Quizplus · Accepted Answer

Setting the transfer price at $200 maximizes the profit within Affiliate B, where the tax rate is higher (50%). This strategy minimizes the overall tax liability for the parent company by shifting more income to Affiliate A, where the tax rate is lower (20%).

Affiliate a Sells a Million Units to Affiliate B Per