Assume that Alpha is going to produce the widgets for $400 and sell the widgets for $700. The manager of Alpha Company, in order to meet their performance evaluation goal, decides to sell the widgets to a sales division owned by Multi-Diversified that is located in the Cayman Islands (corporate tax rate = 0%). The widgets have an industry-average mark-up on cost of 40%.

1. What is the negotiated transfer price using the cost-plus method?
2. Assume Multi-Diversified (the parent) intervenes and sets a discretionary transfer price of $450. Please explain why MD would take this action and which parties will be harmed in this deal (use financial figures in your answer).