AAT L4 Transfer Pricing and Divisional Performance 2

Question 1

Division P has variable costs of £20 and fixed costs of £8 per unit. What is the transfer price under full cost-plus pricing with a 25% profit mark-up?

Accepted Answer

£35

Answer

£28

Answer

£25

Answer

£33.60

Question 2

Which of the following is a disadvantage of using market price as a transfer price?

Accepted Answer

A reliable external market price may not always exist for the transferred product

Answer

It always leads to dysfunctional decision-making

Answer

It discourages the selling division from transferring internally

Answer

It always benefits the buying division at the seller's expense

Question 3

Residual Income is considered superior to ROI as a divisional performance measure because:

Accepted Answer

It encourages managers to accept any project that earns above the company's cost of capital

Answer

It is simpler to calculate

Answer

It can be compared easily across divisions of different sizes

Answer

It requires no cost of capital estimate

Question 4

A selling division operates at full capacity of 10,000 units, all sold externally at £60. Variable costs are £35 per unit. A buying division requests 2,000 units. What is the minimum transfer price per unit?

Accepted Answer

£60

Answer

£35

Answer

£25

Answer

£45

Question 5

The Balanced Scorecard approach to performance measurement uses which four perspectives?

Accepted Answer

Financial, Customer, Internal Business Processes, Learning and Growth

Answer

Financial, Marketing, Operations, Human Resources

Answer

Profitability, Liquidity, Efficiency, Gearing

Answer

Strategic, Tactical, Operational, Administrative

Question 6

Which type of responsibility centre has managers responsible for revenues and costs but NOT capital investment decisions?

Accepted Answer

Profit centre

Answer

Cost centre

Answer

Revenue centre

Answer

Investment centre

Question 7

An investment centre has a target ROI of 15% and a company cost of capital of 20%. A new project offers an ROI of 18%. Which statement is correct?

Accepted Answer

ROI and Residual Income give conflicting signals in this scenario

Answer

The manager will accept the project because it exceeds the 15% target ROI

Answer

The manager will reject it because it falls below the cost of capital

Answer

The decision depends solely on the negotiated transfer price