Princeton International has production and marketing divisions throughout the world. It produces one particular product in Ireland, where the income tax rate is 24%, and transfers it to a marketing division in Japan, where the income tax rate is 45%. Assume that Japan places an import tax of 13% on the product and that import duties are not deductible for income tax purposes. The variable cost of the product is 500 and the full cost is 800. Suppose the company can legally select a transfer price anywhere between the variable and full cost.

1. What transfer price should Princeton International use to minimize taxes? Explain why this is the tax-minimizing transfer price.

2. Compute the amount of taxes saved by using the transfer price in requirement 1 instead of the transfer price that would result in the highest taxes.