Olando plc, a UK based multinational company, has subsidiaries in three countries - U, M and B.

The subsidiary in U manufactures specialist components, which are assembled and sold in either M or B. Production and sales will be 400,000 units per year no matter where the assembly and sales take place.

Manufacturing costs in U are $16 per unit and fixed costs (for the normal range of production) $1.8 million. Assembly costs in M are $9 per unit, and in B $7.5 per unit. Fixed costs are $700,000 and $900,000 respectively. The unit sales price in M is $40 and in B $37.

Corporate taxes on profits are at the rate of 40% in U, 25% in M, 32% in B, and 30% in the UK. No tax credits are available in these three countries for any losses made.

A withholding tax of 15% is deducted from all dividends remitted from U.

Olando expects about 60% of profits from each subsidiary to be remitted to the UK each year.

Required

(a)Identify whether the transfer price from U should be based on fixed cost + variable cost, or fixed + variable + a 30% mark-up.

(b)Identify whether assembly should take place in M or B.