Multi-Diversified (MD) is an established, U.S.-based multinational corporation that is in the business of producing and selling widgets. MD is listed on the New York Stock Exchange (NYSE) and is required to report using U.S. GAAP. They are headquartered in Las Vegas, Nevada and employ nearly 50,000 people. Sustainability is a major part of their brand and company culture. MD voluntarily produces CSR reports in addition to their financials each period.

After performing a SWOT analysis, MD decided that they needed to expand internationally to areas that have low labor costs, low tax rates, and where there is a sufficient market demand for widgets.

Before selecting potential geographical areas for expansion, MD wants to gauge the international appetite for widgets by making export sales to the large global market of Singapore. They made the sales on May 1, 2020 (sales price: 10,000 foreign currency units) and collected payment on May 31, 2020.

Management identified three potential international targets for a new and highly efficient production facility. Management estimates that they have $1,000,000 to initially invest. They need to reclaim their investment within 5 years and require a return of at least 5%. The information about these targets is below.

For whichever target MD chooses, MD plans to be very involved in day-to-day operations as well as determine sales prices, lend money to the target for wages and capital investment decisions, and have a significant amount of upstream and downstream transactions.

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).