Modern Fixtures enterprise makes all types of office chairs. The Standard Division is currently producing 10,000 chairs per year with a maximum capacity of 16,000 chairs. The variable costs assigned to each chair are $250 and annual fixed costs of the division are $800,000. The Standard Division sells its chair to external market for $350. Recently, the Exclusive Division proposed to purchase 6,000 chairs at $220 for its custom office design business. The Standard Division manager refused the order because the price offered for the trade was not lucrative. The Exclusive Division manager argues that the order should be accepted because it will lower the fixed cost per chair from $80 to $50 and will take the division to operate at its capacity, thereby causing operations to be at their most efficient level.

Required:

1. When cost-based transfer pricing is used to trade between subunits of a large organization, discuss how to avoid making suboptimal decisions.