Merck Mexicana SA, the wholly owned affiliate of the U.S. pharmaceutical firm, is considering alternative financing packages for its increased working capital needs resulting from growing market penetration. Ps 250 million are needed over the next six months and can be financed as follows:

a. If interest payments can be made through the stabilized tier of the Mexican exchange market where the dollar is worth Ps 125, what is the break even exchange rate on the floating tier that would make Merck Mexicana indifferent between dollar and peso financing?

b. Merck Mexicana imports from its U.S. parent $500,000 worth of chemical compounds monthly, payable on a 90 day basis. Suppose that the parent adjusts its transfer prices so that Merck Mexicana must now pay $700,000 monthly for its chemical supplies. All payments for imports of chemicals involved in the manufacture of pharmaceuticals are transacted through the stabilized tier of the exchange market. At the current exchange rate of Ps 250 = $1, what is the net before tax annual benefit to Merck of this transfer price increase?