Cheney Corporation produces goods in the United States, to be sold by a separate division located in Italy. More specifically, the Italian division imports units of product X34 from the U.S. and sells them for $950 each. (Imports of similar goods sell for $850) The Italian division is subject to a 40% tax rate whereas the U.S. tax rate is only 30%. The manufacturing cost of product X34 in the United States is $720. Furthermore, there is a 10% import duty, computed on the transfer price, that will be paid by the Italian division and is deductible when computing Italian income.
Tax laws of the two countries allow transfer prices to be set at U.S manufacturing cost of the selling prices of comparable imports in Italy.
required:
Analyze the profitability of the U.S. division and the Italian division to determine whether Cheney as a whole would be better off if transfers took place as (1) U.S. manufacturing cost or (2) the selling price of comparable imports.