Optimal Transfer Price
Scenario: Subsidiary X sells 10,000 units to Subsidiary Y annually. The marginal income tax rate for Subsidiary X is 30% and the marginal income tax rate for Subsidiary Y is 45%. The transfer price per unit is currently $5,000, but it is likely to adjust at any level between $5,000 and $5,500.
Your Task: Derive a formula to determine the increase in the annual after-tax profits by selecting the optimal transfer price. Then, calculate, to adjust, the optimal transfer price.