AAT L4 Transfer Pricing and Divisional Performance 3

Question 1

Under a two-part tariff system for transfer pricing, how does the buying division pay for transferred units?

Accepted Answer

A fixed fee plus variable cost per unit transferred

Answer

Market price for all units transferred

Answer

Full absorption cost per unit only

Answer

Variable cost per unit only with no fixed element

Question 2

Which non-financial performance indicator would MOST appropriately measure customer satisfaction in a retail division?

Accepted Answer

Customer complaint rate

Answer

Return on capital employed

Answer

Material usage variance

Answer

Debtor days

Question 3

The 'arm's length principle' in international transfer pricing requires that:

Accepted Answer

Transfer prices are set as if the divisions were independent companies dealing at open-market rates

Answer

Group divisions are kept at a physical distance from each other

Answer

Transfer prices maximise profit retained in the lowest-tax jurisdiction

Answer

Transfer prices equal marginal cost in all circumstances

Question 4

Benchmarking as a performance measurement tool primarily involves:

Accepted Answer

Comparing performance against best practice in the industry or other organisations

Answer

Comparing actual results against a fixed standard set at the start of the year

Answer

Setting targets based solely on the division's own historical performance

Answer

Measuring performance only against internal company standards

Question 5

Which of the following is a key limitation of Residual Income (RI) as a divisional performance measure?

Accepted Answer

It cannot easily be compared across divisions of different sizes

Answer

It discourages investment in projects earning above the cost of capital

Answer

It always produces the same result as ROI

Answer

It requires no imputed interest rate to calculate

Question 6

A company uses a 10% cost of capital. Division C has operating profit of £45,000 and capital employed of £300,000. What is Division C's Residual Income?

Accepted Answer

£15,000

Answer

£45,000

Answer

-£15,000

Answer

£30,000

Question 7

Which dysfunctional behaviour can result from using ROI as the sole measure of divisional performance?

Accepted Answer

Managers may reject profitable projects that would lower their current divisional ROI

Answer

Managers always accept all new investment opportunities presented to them

Answer

Managers focus equally on short-term and long-term performance

Answer

Transfer pricing disputes between divisions are eliminated