5. Affiliate A sells 5,000 units to Affiliate B per year. The marginal income tax rate for Affiliate A is 25 percent and the marginal income tax rate for Affiliate B is 40 percent.

Additionally, Affiliate B pays a tax-deductible tariff of 5 percent on imported merchandise.

The transfer price per unit is currently $2,000, but it can be set at any level between $2,000 and $2,400. Derive

(a) a formula to determine the effective marginal tax rate for Affiliate B, and

(b) a formula to determine how much annual after-tax profits can be increased by selecting the optimal transfer price