The U.S. division of MegaBig, Inc., has excess capacity. MegaBig's European division, lo¬

cated in Lisbon, has offered to buy a component that would increase the U.S. division's uti¬

lization of capacity from 70 to 80%. The component has an outside market in the United States with a unit selling price of $12. The variable costs of production for the component are $6. Landing costs total $2 per unit, and an internal transfer avoids $1.25 per unit of vari¬

able marketing costs. The European and U.S. divisions agree on a transfer price of $9. The European division can purchase the component locally for $12.

Required:

Suppose you have scheduled a meeting with an IRS representative. What arguments would you make for an advance pricing agreement that would permit the use of the $9 price?