Evaluate transfer pricing system
Mississippi Company has two decentralized divisions, Illinois and Iowa. Illinois always has purchased certain units from Iowa at $60 per unit. Because Iowa plans to raise the price to $80 per unit, Illinois is considering buying these units from outside suppliers for $60 per unit. Iowa’s costs follow:
| Variable costs per unit | $56 |
| Annual fixed costs | $100,000 |
| Annual production of these units | 5,000 units |
Required
If Illinois buys from an outside supplier, the facilities that Iowa uses to manufacture these units will remain idle. What will be the result if Mississippi enforces a transfer price of $80 per unit between Illinois and Iowa?
