Cia. Sevilla de Olivos, S.A. (Sevilla Olive Company) sells containers of Spanish olives to its wholly owned distribution afriliate in Frankfurt, Germany. Spanish income tax rates are \(25 \%\) and German tax rares are \(50 \%\). All accounts are kept in curos. At present, profit per container is \(€ 60\), calculated as follows:

a. What happens to profits if Sevilla de Olivos' transfer price is increased \(12.5 \%\) to \(€ 360\) ?

b. What happens to profits if, after Sevilla de Olives increases its transfer price to \(€ 360\), German tax authorities disallow the new transfer price and impose the old \(£ 320\) price for German tax purposes?

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Sevilla de Olivas Frankfurt Subsidiary Direct costs Overhead 200 80 320 20 Total costs 280 340 Desired markup 40 60 Transfer/sales price 320 400 Less total costs -280 -340 Taxable income 40 60 Less taxes (25% and 50%) -10 -30 Post-tax profit 30. 30 Consolidated profit 60