Cassie’s Computer Parts has two decentralized divisions, Hardware and Pre-Fab. Pre-Fab has always purchased certain units from Hardware at $230 per unit. Because Hardware plans to raise the price to $260 per unit, Pre-Fab desires to purchase these units from outside suppliers for $230 per unit. Hardware’s costs follow: variable costs per unit, $200; annual fixed costs, $30,000. Annual production of these units for Pre-Fab is 1,500 units.
If Pre-Fab buys from an outside supplier, the facilities Hardware uses to manufacture these units would remain idle. What would be the result if Cassie’s Computer Parts’ management enforces a transfer price of $260 per unit between Hardware and Pre-Fab?