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evaluate transfer pricing system mississippi company has two decentralized divisions 691315

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?

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