Affiliate A sells 5,600 units to Affiliate B per year. The marginal income tax rate for Affiliate A is 25 percent and the marginal income tax rate for Affiliate B is 40 percent. Additionally, Affiliate B pays a tax-deductible tariff of 5 percent on imported merchandise. The transfer price per unit is currently $2,000, but it can be set at any level between $2,000 and $2,400. Derive (a) a formula to determine the effective marginal tax rate for Affiliate B and (b) a formula to determine how much annual after-tax profits can be increased by selecting the optimal transfer price.

Affiliate A sells 5,600 units to Affiliate B per year. The marginal income tax rate for Affiliate A is 25 percent and the marginal income tax rate for Affiliate B is 40 percent. Additionally, Affiliate B pays a tax-deductible tariff of 5 percent on imported merchandise. The transfer price per unit is currently $2,000, but it can be set at any level between $2,000 and $2,400. Derive (a) a formula to determine the effective marginal tax rate for Affiliate B and (b) a formula to determine how much annual after-tax profits can be increased by selecting the optimal transfer price.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

**Required:**

Affiliate A sells 5,600 units to Affiliate B per year. The marginal income tax rate for Affiliate A is 25 percent, and the marginal income tax rate for Affiliate B is 40 percent. Additionally, Affiliate B pays a tax-deductible tariff of 5 percent on imported merchandise. The transfer price per unit is currently $2,000, but it can be set at any level between $2,000 and $2,400. Derive (a) a formula to determine the effective marginal tax rate for Affiliate B and (b) a formula to determine how much annual after-tax profits can be increased by selecting the optimal transfer price.

**Note: Do not round intermediate calculations. Enter the "Effective marginal tax rate" as percentage rounded to whole number.**

| Effective marginal tax rate | % |
|----------------------------|---|
| Increase in annual after-tax profits | |

(Note: No additional graphs or diagrams are present in the image.)

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