Problem
Suppose Navistar's Canadian subsidiary sells 1,500 trucks monthly to the French affiliate at a transfer price of $27,000 per unit. The Canadian and French marginal tax rates on corporate income are assumed to equal 45% and 50%, respectively. Suppose the transfer price can be set at any level between $25,000 and $30,000. At what transfer price will corporate taxes paid be minimized? Explain.
If tA > tB , set the transfer price and the mark-up policy as LOW as possible.
If tA < tB , set the transfer price and the mark-up policy as HIGH as possible.