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

A two-part tariff charges variable cost per unit for short-run decision-making efficiency, plus a fixed fee to recover the selling division's fixed costs.

Question 2

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

Accepted Answer

Customer complaint rate

Answer

Customer complaint rate directly captures customers' experience with the division's product or service.

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

Tax authorities require intra-group transfer prices to reflect what unrelated third parties would charge each other in a competitive market.

Question 4

Benchmarking as a performance measurement tool primarily involves:

Accepted Answer

Comparing performance against best practice in the industry or other organisations

Answer

Benchmarking identifies external best practice and uses it as a performance target to drive continuous improvement.

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

RI is an absolute monetary figure, so a larger division will naturally show a higher RI, making like-for-like comparisons between divisions misleading.

AAT Level 4 Practice Test

AAT Level 4 Practice Test

AAT L4 Transfer Pricing and Divisional Performance 3