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.

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 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 $4,400 Cost of goods sold 2,000 3,000 2,000 Gross profit Operating expenses Earnings before taxes Taxes (30%/50%) Net income $1,000 $1,400 $2,400 200 200 400 $ 800 $1,200 $2,000 240 600 840 $ 560 $ 600 $1,160