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

Full cost = £20 + £8 = £28; with a 25% mark-up: £28 × 1.25 = £35.

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

Market-based transfer pricing requires a competitive external market, which may not exist for specialised or intermediate products.

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

Unlike ROI, RI increases for any project earning above the cost of capital, so it avoids the problem of managers rejecting value-adding investments.

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

At full capacity the opportunity cost is the contribution foregone (£60 − £35 = £25), so minimum TP = £35 + £25 = £60.

Question 5

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

Accepted Answer

Financial, Customer, Internal Business Processes, Learning and Growth

Answer

Kaplan and Norton's Balanced Scorecard comprises Financial, Customer, Internal Business Process, and Learning and Growth perspectives.

AAT Level 4 Practice Test

AAT Level 4 Practice Test

AAT L4 Transfer Pricing and Divisional Performance 2