Response to the following problem:
The XYZ Corporation is a United States corporation with subsidiaries in several countries. Suppose that the United States corporate marginal tax rate is 35% and that one of its subsidiaries is operating in a foreign country where the marginal tax rate is 47%. XYZ Corporation manufactures a product for US$60 a unit and sells 50,000 units to the subsidiary each year. The subsidiary, in turn, further processes each unit at a cost of $40 per unit and sells the finished product for $240 per unit. The fixed costs for XYZ Corporation and the subsidiary are $2,000,000 and $1,000,000, respectively.
a. What are the taxes and the net income of the parent, the subsidiary, and the company as a whole if the transfer price is set at $90 per unit?
b. What are the taxes and the net income of the parent, the subsidiary, and the company as a whole if the transfer price is set at $120 per unit?
c. Given your answers to (a) and (b), how does the choice of a transfer price affect the company as a whole?