Company 1, Inc and Company 2 are both wholly owned subsidiaries of Parent, Inc. Parent has no other operations, balance sheet items or income statement items other than its ownership of Company 1 (located in China) and Company 2 (located in US). Company 2 periodically sells goods to Company 1 for resale to end customers. Such goods are sold at the same pricing terms that Company 2 sells to all other customers. Prior to January 1, 2018, there had never been any inventory sales from Company 1 to Company 2 or from Company 2 to Company 1. The following is data for each company for 2018 and 2019:

Company 1 Company 2

Year ended 12/31/18

Sales to all customers $300 million $150 million

Costs of sales $150 million $100 million

All other non production expenses $ 60 million $ 40 million

Pre tax income $ 90 million $ 10 million

Inventory purchased from Company 1 held

By Company 2 at end of year NONE

Inventory purchased from Company 2 held

By Company 1 at end of year $15 million

Year ended 12/31/19

Sales to all customers $280 million $160 million

Costs of sales $140 million $120 million

All other non production expenses $ 60 million $ 30 million

Pretax income $ 80 million $ 10 million

Inventory purchased from Company 1 held

By Company 2 at end of year NONE

Inventory purchased from Company 2 held

By Company 1 at end of year $16 million

For the data in this problem set (10-12), assume the following additional facts:

a. There are significantly more intercompany inventory sales from US to Company 1 than just the amounts included in ending inventory

b. Company 1 tax rate is 10% and US tax rate is 25%

c. Beginning on 1/1/19, Company 2 had decided to increase its transfer price to Company 1 by 30% rather than charge Company 1 exactly the same price as Company 2 charged outside customers. This would have been expected to have the following impact on the consolidated financial statements of Parent in 2019

Pretax income Net income

a. No change No change

b. Increase Increase

c. No change Decrease

d. Decrease Decrease

e. None of the above combinations are correct