Question: Denker Corporation has a wholly owned subsidiary in Sri Lanka that manufactures wooden bowls at a cost of $3 per unit. Denker imports the wooden bowls and sells them to retailers at a price of $12 per unit. The following information applies:

                                                    United States           Sri Lanka

Income tax rate                                    35%                     30%

Import duty                                          10%                      -

Withholding tax rate on dividends              -                         10%

Import duties are levied on the invoice price and are deductible for income tax purposes. The Sri Lankan subsidiary must repatriate 100 percent of after-tax income to Denker each year. Denker has determined an arm's-length range of reliable transfer prices to be $5.00-$6.00.

Required: a. Determine the transfer price within the arm's-length range that would maximize Denker's after-tax cash flow from the sale of wooden bowls.

b. Now assume that the withholding tax rate on dividends is 0 percent. Determine the transfer price within the arm's-length range that would maximize Denker's after-tax cash flow from the sale of wooden bowls.