Cameo Products has two divisions: Office Products and Furniture. Divisional managers are encouraged to maximize ROI at their respective divisions. Managers are free to decide whether goods will be transferred internally and to determine the prices at which transfers will occur.

The Furniture Division would like to purchase a particular chair manufactured in the Office Products Division and sell it with a computer desk the division recently has designed. The Furniture Division can purchase a similar chair from an outside supplier for \(\$ 45\). The Office Products Division currently is producing this chair at full capacity and sells it to outside customers at \(\$ 45\). The manager of the Furniture Division is hoping to receive a price concession if the chair is bought internally. The fully absorbed cost to produce the chair is \(\$ 40\) ( \(\$ 32\) represents variable costs). If the chair is sold internally, \(\$ 3\) of variable selling expenses can be avoided.

The managers of the two divisions met to discuss the possible transaction. After some discussion and negotiation, it was decided that the Furniture Division would purchase the chair at the current outside selling price for the next six months. At the end of six months, negotiations can be reopened by either party if desired.

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A. Based on current information, what is the highest price that the Furniture Division should be willing to pay for the chair? What is the lowest price that the Office Products Division should be willing to accept?

B. Assume that the outside sales price of the chair increases to \(\$ 47\). How would this affect the internal transfer price of the chair?

C. Assume that because of soft market conditions, demand for the chair has decreased significantly, creating excess idle capacity within the Office Products Division. How would this change affect the internal transfer price of the chair?

D. Why is it in the best interest of the company as a whole to allow the division managers to negotiate internal transfer prices instead of using a fixed, nonnegotiable formula for establishing transfer prices?