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?