The XYZ Corporation is an American company that manufactures the parts needed for its products abroad in country M. It assembles them in the U.S. The transfer price is $500 and the exchange rate is 2 units of M-pesos for $1.
In April, the company will ship 1000 units from country M to the U.S. The plant, in country M, has variable costs of 650 pesos and fixed costs of 20,000 pesos. The processing cost in the U.S. is $10 per unit with fixed operation costs of $1000. The final product can be sold for $750 each. If the tax rate in country M is 20%, while in the U.S. it is 40%; what is the profit in each country? What are the combined profits in U.S. dollars for the month? What happens if we change the transfer price to $600? Why?