Question 1

An organization has a decentralized structure in which division A supplies division B with an intermediate product for which there is no external market. Division B carries out further processing and then sells the final product on the external market. Due to organizational policy the current transfer pricing basis is variable cost.
The manager of division A has stated, 'The current transfer price is unfair because it does not enable us to recoup our costs'.
The manager of division B has stated, 'The current transfer pricing system enables us to quote competitive prices for the finished product'.
The Chief Executive of the organization is considering imposing a transfer pricing policy that uses dual pricing.
Dual pricing would:

Options :

A : be welcomed by the manager of division A but the manager of division B would resist it.

B : be welcomed by both divisional managers.

C : increase divisional autonomy.

D : involve a lump sum payment to division A in addition to the payment of the variable cost per unit.

Answer: B

Question 2

A company manufactures and sells a range of products. Relevant data for one unit of a particular product are as follows.

The company is using target costing to ensure that it achieves a contribution of 40% of the market selling price.
In order to achieve the target cost, by how much does the company need to reduce the variable cost per unit?

Options :

A : $ 2.10

B : $ 0.50

C : $ 1.40

D : $ 2.60

Answer: B

Question 3

When considering a capital investment, relevant costs for decision making have which THREE of the following features?

Options :

A : They are future costs.

B : They are committed costs.

C : They are incremental costs.

D : They are unavoidable costs.

E : They are cash flows.

Answer: A,C

Question 4

A manufacturing company has recently introduced a Total Quality Management (TQM) system. The company has invested heavily in the education and training of its staff, in addition to implementing new product design engineering. There is a plan to sample units from each batch of products manufactured to test for errors, although this has not yet been implemented due to budget constraints.
The company is experiencing high levels of customer complaints, with many faulty units being returned by the customer for refund or replacement. Sales revenue has fallen recently, mainly due to negative press coverage linked to dissatisfied customers.
Select the statement MOST likely to apply.

Options :

A : The high level of external failure costs is the result of a lack of expenditure on prevention costs.

B : The high level of internal failure costs is the result of a lack of expenditure on appraisal costs.

C : The high level of external failure costs is the result of a lack of expenditure on appraisal costs.

D : The high level of internal failure costs is the result of a lack of expenditure on prevention costs.

Answer: C

Question 5

A company is investing $150,000 in a project which will yield an annual cash inflow of $40,000 for eight years. The company's cost of capital is 10%.To the nearest $100, what is the project's equivalent annual net present value?

Options :

A : $11,900

B : $7,900

C : $63,400

D : $21,300

Answer: A

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