Manchester International has production and marketing divisions throughout the world. It produces one particular product in Ireland, where the income tax rate is 16%, and transfers it to a marketing division in Japan, where the income tax rate is 48%. Assume that Japan places an import tax of 13% on the product and that import duties are not deductible for income tax purposes. The variable cost of the product is E200 and the full cost is E350. Suppose the company can legally select a transfer price anywhere between the variable and full cost.
1. What transfer price should Manchester international use to minimize taxes? Explain why this is the tax-minimizing transfer price.
2. Compute the amount of taxes saved by using the transfer price in requirement 1 instead of transfer price that would result in the highest taxes.