Suppose Navistar's Canadian subsidiary sells 1,500 trucks monthly to the French affiliate at a transfer price of $27,000 per unit. Assume that the Canadian and French marginal tax rates on corporate income equal 45 percent and 50 percent, respectively.
a. 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.
b. Suppose the French government imposes an ad valorem tariff of 15 percent on imported tractors. How would this tariff affect the optimal transfer pricing strategy?
c. If the transfer price of $27,000 is set in euros and the euro revalues by 5 percent, what will happen to the firm's overall tax bill? Consider the tax consequences both with and without the 15 percent tariff.
d. suppose the transfer price is increased from 27000 to 30000 and credit from 90 to 18o days. what are the fund flow implications of these adjustments?