Motor Magic has two operating divisions: one in the UK and one in Mexico. The Mexican division produces a component part used in the production process of the UK division. If the UK division purchases the part from the Mexican division, a transfer price of $700,000$ is charged. However, if the UK division were to purchase the part from an outside supplier, the cost would be $800,000.$ The operating expenses for the Mexican and UK divisions are, respectively, $250,000$ and $400,000($not including the cost of goods transferred from the Mexican division$).$ The UK division has revenue amounting to $1,600,000.$ The company's CEO is trying to decide which amount should be used for the transfer price $(700,000$ or $800,000).$

Required:

Assume that the marginal tax rates for Mexico and the UK are $28$ percent and $25$ percent, respectively. What is the tax liability of each division for each of the transfer pricing alternatives?

Which transfer pricing alternative will produce the lowest tax liability for the company as a whole?