6. Lipstick Company has received a special one-time order for some of their lipsticks, which will not affect sales to other customers. There are idle facilities, so there will be no increase in fixed costs. The customer offers to pay $5/lipstick.

Variable costs are $3/lipstick in Dept. A and $1/lipstick in Dept. B Dept. A "sells" their partially processed lipsticks to Dept. B at a transfer price of 150% of Dept. A's variable costs ($4.50). There is not external demand for the partially

processed lipsticks. (a) will the firm optimal course of action be made at this transfer price? Explain why or why not (as part of your answer you need to identify what the firm optimal course of action is!) (b) Is there an incentive for the two divisions to negotiate for an alternative transfer price? What would be the range of acceptable transfer prices?