1. Affiliate X sells 10,000 units to Affiliate Y per year. The marginal tax rates for X and Y are 20 percent and 30 percent, respectively. The transfer price per unit is currently set at $1,000, but it can be set as high as $1.250. Calculate the increase

in annual after-tax profits if the higher transfer price of $1,250 per unit is used.

2.Affiliate A sells 5,000 units to Affiliate B per year. The marginal income tax

the rate for Affiliate A is 25 percent and the marginal income tax rate for Affiliate B is 40 percent. 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 formula to determine how much

annual after-tax profits can be increased by selecting the optimal transfer price.