Suppose that DMR SA, located in Switzerland, sells $1 million worth of goods monthly to its affiliate DMR GmbH, located in Germany. These sales are based on a unit transfer price of $100. Suppose the transfer price is raised to $130 at the same time that credit terms are lengthened from the current 30 days to 60 days.
a. What is the net impact on cash flow for the first 90 days? Assume that the new credit terms apply only to new sales already booked but uncollected.
b. Assume that the tax rate is 25% in Switzerland and 50% in Germany and that revenues are taxed and costs deducted upon sale or purchase of goods, not upon collection. What is the impact on after-tax cash flows for the first 90 days?