Mississippi Company has two decentralized divisions, Illinois and Iowa. Illinois

Question

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 (Please show work) :
If Illinois buys from an outside supplier, the facilities that Iowa uses to manufacture these units will remain idle. What will be the impact on the Mississippi Company if Illinois buys from the outside supplier?
The Mississippi Company suffers a loss in contribution of $_____.

Explanation / Answer

If Illinois buys from an outside supplier coz TP > $60

impact costs = (60 - 56) * 5000 = $20,000

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