The New Haven Autolock Company of Connccticut manufacturcs automobile door locks that work by a number combination as well as by kevs. Manufacturing each lock involves direct labor cost of \(\$ 20\), direct matcrial costs of \(\$ 10\), and manufacturing overhcad of \(\mathrm{S4}\). A portion of production is sold to Rotterdam Autolock Company of the Netherlands, New Haven's wholly owned European distribution affiliate, for \(\$ 44\) per lock. Amsterdam Autolock incurs an additional \(\$ 6\) of direct costs and resells to European automobile manufacturers for \(\$ 60\) per lock, which price is derermined by competition. No other costs are involved except for income taxes. The U.S, tax rate is \(30 \%\) and the Dutch tax rate is \(40 \%\), New Haven's chief financial manager judges that transficr prices to Europe could be raised or lowered \(20 \%\) without causing a tax challenge. Hence, he wonders whether New Haven should change the transfer price at which it sells to its affiliates.

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