### Determine how much annual after tax profits

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Affiliate A sells 5,000 units to Affiliate B per year. The marginal income tax rate for Affiliate A is 25 percent and the marginal income tax rate for Affiliate B is 40 percent. Additionally, Affiliate B pays a tax-deductible tariff of 5 percent on imported merchandise. The transfer price per unit is currently \$2,000, but it can be set at any level between \$2,000 and \$2,400. Derive

(a) A formula to determine the effective marginal tax rate for Affiliate B, and

(b) A formula to determine how much annual after-tax profits can be increased by selecting the optimal transfer price.

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