CA Management Accounting 3

Question 1

A company is considering dropping a product line that shows a net loss. Which cost is most relevant to this decision?

Accepted Answer

Avoidable fixed costs of the product line

Answer

Avoidable fixed costs that would be eliminated if the product line is dropped are the most relevant costs in the decision.

Question 2

What is the margin of safety?

Accepted Answer

The excess of actual or budgeted sales over break-even sales

Answer

The margin of safety measures how much sales can decline before the company reaches break-even, expressed as a dollar amount or percentage.

Question 3

Which transfer pricing method uses the market price of the transferred good or service?

Accepted Answer

Market-based transfer pricing

Answer

Market-based transfer pricing uses the external market price as the internal transfer price, which is generally considered the most objective method.

Question 4

What does Economic Value Added (EVA) measure?

Accepted Answer

Net operating profit after tax minus the cost of capital employed

Answer

EVA = NOPAT − (Invested Capital × WACC), measuring whether the company earns more than its cost of capital.

Question 5

In capital budgeting, what does the profitability index measure?

Accepted Answer

The ratio of the present value of future cash flows to the initial investment

Answer

The profitability index (PI) = PV of future cash inflows ÷ Initial investment; a PI greater than 1.0 indicates an acceptable project.

(CA) Certified Accountant Practice Test