AAT L4 Transfer Pricing and Divisional Performance

Question 1

Division A has operating profit of £150,000 and net assets of £600,000. What is Division A's Return on Investment (ROI)?

Accepted Answer

25%

Answer

4%

Answer

40%

Answer

15%

Question 2

What is the MINIMUM transfer price a selling division should accept when operating at full capacity?

Accepted Answer

Variable cost plus contribution foregone on lost external sales

Answer

Variable cost only

Answer

Full cost plus a profit margin

Answer

Market price minus selling costs saved

Question 3

Residual Income (RI) is calculated as:

Accepted Answer

Operating profit minus imputed interest on capital employed

Answer

Operating profit divided by capital employed

Answer

Net profit after tax divided by equity

Answer

Operating profit plus depreciation

Question 4

A company has a cost of capital of 12%. Division B has capital employed of £500,000 and operating profit of £80,000. What is Division B's Residual Income?

Accepted Answer

£20,000

Answer

£60,000

Answer

-£20,000

Answer

£140,000

Question 5

Which of the following is an advantage of using Return on Investment (ROI) as a divisional performance measure?

Accepted Answer

It is widely understood and can be compared across divisions of different sizes

Answer

It avoids dysfunctional decision-making by managers

Answer

It always leads to goal congruence with company objectives

Answer

It eliminates the impact of different depreciation policies

Question 6

Division X can sell its product externally for £50 per unit. Variable costs are £30 per unit. Division X has spare capacity. What is the minimum transfer price it should charge Division Y?

Accepted Answer

£30

Answer

£40

Answer

£50

Answer

£20

Question 7

Which statement best describes goal congruence in the context of transfer pricing?

Accepted Answer

A transfer price should motivate divisional managers to make decisions that maximise overall company profit

Answer

Market price transfer pricing always leads to goal congruence

Answer

Cost-based transfer prices always achieve goal congruence

Answer

Negotiated transfer prices never achieve goal congruence