1. What issues does this case raise?

2. What courses of action would you recommend to resolve the issues you have identified?

MINI CASE 

Muscle Max–Asia, a wholly owned affiliate of a French parent company, functions as a regional headquarters for operating activities in the Pacific Rim. It enjoys great autonomy from its French parent in conducting its primary line of business, the manufacture and sale of Muscle Max, a commercial-grade weight-lifting machine that can be used in athletic clubs or in the home. Muscle Max–Asia has manufacturing affiliates in Malaysia and Canton (China) and distribution outlets in Australia, Japan, New Zealand, South Korea, and Singapore. It plans to expand its operations to other Pacific Rim countries in the next several years. Given the demand for weightlifting equipment in Australia, the company’s distribution affiliate there, Muscle Max–Australia, has been importing its equipment from both Canton and Malaysia, paying a customs duty of 5 percent. Competing suppliers of similar equipment have approached the Australian affiliate for orders. Prices quoted on such machinery have ranged between 650 to 750 Australian dollars (A$). Muscle Max–Australia, which currently retails the machine for A$1,349, recently complained to Muscle Max–Asia because of the differences in the prices it is being charged by its sister affiliates in Canton and Malaysia. Specifically, while the Malaysian affiliate charges a per unit price of A$675, the Canton supplier’s price is 26 percent higher. Muscle Max–Asia explains that the transfer price, based on a cost-plus formula (production costs total A$540 per unit), reflects several considerations, including higher margins to compensate for credit risk, operating risk, and taxes. As for taxes, Muscle Max–Asia explains that the People’s Republic of China provides fiscal incentives to enterprises that promote exports. Although normal corporate income tax rates are 33 percent, Cantonese tax authorities have agreed to a rate of 10 percent on all export-related earnings.