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?