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 is classifying its quality costs to prepare a quality cost report. Which of the following are conformance costs?
Select ALL that apply.

Options :

A : Internal Failure Costs

B : External Failure Costs

C : Prevention Costs

D : Appraisal Costs

Answer: C,D

Question 3

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 4

A large company that sells a single product has many customers. The contribution per unit of the product is $40. Data for the company as a whole are given below.

Using customer profitability analysis, what is the total annual profit for this customer?

Options :

A : $1,660,000

B : $1,780,000

C : $1,460,000

D : $2,340,000

Answer: A

Question 5

A project has a positive net present value (NPV) when discounted at a company's weighted average cost of capital (WACC). The project has also been evaluated using a range of other investment appraisal techniques.
It has now been recognized that the project is of much higher risk than the average risk of the company's existing portfolio of projects. It has therefore been decided that the discount rate to be used when evaluating this project should be the WACC adjusted for risk.
As the result of changing the discount rate as described, which of following statements are correct?
Select ALL that apply.

Options :

A : The net present value would decrease.

B : The internal rate of return would decrease.

C : The accounting rate of return would decrease.

D : The internal rate of return would remain unchanged.

E : The profitability index would remain unchanged.

F : The net present value would increase.

Answer: A,D

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