The U.S. division of ABC, Inc., has excess capacity. ABC's European division, located in Lisbon, has offered to buy a component that would increase the U.S. division's utilization of capacity from 70 to 80 percent. The component has an outside market in the United States with a unit selling price of $14. The variable costs of production for the component are $7. Landing costs total $2.50 per unit, and an internal trans- fer avoids $1.80 per unit of variable marketing costs. The European and U.S. divi- sions agree on a transfer price of $10. The European division can purchase the com- ponent locally for $12.
Required
Suppose you have scheduled a meeting with an IRS representative. What arguments would you make for an advance pricing agreement that would permit the use of the $10 price?