Smeal College of Business Managerial Accounting: B A 521Pennsylvania State University Professor HuddartAnita Corporation1Multinational transfer pricing and taxation.Anita Corporation, headquartered in the U.S., manufactures state-of-the-art milling machines. It has two marketing subsidiaries, one in Braziland one in Switzerland, that sell its products. Anita is considering buildingone new machine, at a cost of $500,000. There is no market for theequipment in the United States. The equipment can be sold in Brazilfor $1,000,000, but the Brazilian subsidiary would incur transportation andmodification costs of $200,000. Alternatively, the equipment can be sold inSwitzerland for $950,000, but the Swill subsidiary would incur transportationand modification costs of $250,000. The U.S. company can sell the equipmenteither to its Brazilian subsidiary or to its Swiss subsidiary but not toboth. Anita Corporation and its subsidiaries operate in a very decentralizedmanner. Managers in each company have considerable autonomy, with eachdivision manager interested in maximizing his or her own division’s income.Required(1) From the viewpoint of Anita and its subsidiaries taken together, shouldAnita Corporation manufacture the equipment? If it does, where shouldit sell the equipment to maximize corporate operating income? Whatwould the operating income for Anita and its subsidiaries be from thesale? Ignore any income tax effects.(2) What range of transfer prices will result in achieving the actions deter-mined to be optimal in requirement 1? Explain your answer.(3) The effective income tax rates for this transaction follow: 40% inthe United States, 60% in Brazil, and 15% in Switzerland. The taxauthorities in the three countries are uncertain about the cost of theintermediate product and will allow any transfer price between $500,000and $700,000. If Anita and its subsidiaries want to maximize after-taxoperating income: (a) should the equipment be manufactured and (b)where and at what price should it be transferred?1Richard Lambert, adapted.cSteven Huddart, 1995–2009. All rights reserved. www.personal.psu.edu/sjh11B A 521 Anita Corporation(4) Now suppose each manager acts autonomously to maximize his orher own subsidiary’s after-tax operating income. The tax authoritieswill allow transfer prices only between $500,000 and $700,000. Whichsubsidiary will get the product and at what price? Is your answer thesame as your answer in requirement 3? Explain why or why not.Page