Eurowide Corporation has two foreign affiliates: A is in a low-tax country (30 percent tax rate) and B is in a high-tax country (50 percent tax rate). Affiliate A produces partially finished products and sells them to affiliate B, where the production process is completed.

Affiliate B must pay import duties at the rate of 10 percent – 10 percent of the value of the imported goods. These tariffs are tax deductible. The pro forma income statements of these two affiliates are shown in the following table. Assume that the company increases its transfer price from \($3,000\) to \($3,600.\) Determine the tax-plus-tariff effect of this high transfer price on the company’s consolidated net income.

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Pro forma income statements for two affiliates Low tax A High tax B Combined A+B Low transfer prices Sales price $3,000 $4,400 Cost of goods sold 2,000 Import duty (10%) 3,000 300 Gross profit $1,000 $1,100 Operating expenses 200 200 Earnings before taxes $ 800 Taxes (30%/50%) 240 Net income $ 560 $ 450 $ 900 450. $4,400 2,000 300 $2,100 400 $1,700 690 $1,010