A U.S.-based manufacturer of imitation Navajo rugs is about to initiate manufacturing operations offshore for the first time -- in this case -- in the United Kingdom. In the financial planning stages, the firm's principals discuss tradeoffs in parent earnings and subsidiary earnings/expenses, focusing on the various intra-firm cash flows common between sub and parent (material transfers, royalties and license fees, intra-firm debt, etc.). The focus of the case is to determine the preferred combination and form of rates and charges between parent and subsidiary to achieve the firm's financial goals.
The case is used to introduce the rather complex relationship between a parent and its subsidiaries in a multinational firm -- independent of exchange rate issues (Hozho (B) introduces exchange rates into the problem). Tradeoffs associated with the repatriation of cash flows and the tax consequences of existing U.S.-based multinational taxation. The student is forced to confront the issues of exactly what it is that the firm is trying to maximize (e.g., earnings at the parent, subsidiary, or consolidated levels).