A company comprises several divisions.
One of these divisions was originally expected to earn an operating profit next year of $800,000 on net assets of $4 million.
However, the divisional manager is considering investing in a project that would generate a project return on investment (ROI) of 38% on additional net assets of $500,000.
What would be the divisional ROI next year if the project was implemented?
Give your answer to the nearest percentage.
The manager of Ice Sculpting Co. believes that too much material is being wasted during downtime. She researched, and found throughput accounting to be an adequate alternative. However, she wasn't sure if all that
she read was accurate.
Which of the following statements are TRUE when using Throughput Accounting? Select ALL that apply.
An organization's transfer pricing system involves:
• The transferring division receiving $20 per unit; an amount equal to its variable costs.
• The receiving division paying an additional $30,000 every month to the transferring division.
Which transfer pricing system is the organization using?
An organization is considering purchasing a new machine which will cost $600,000. The new machine will generate cost savings of $200,000 each year for five years. The cost of capital is 12%.
The profitability index (PI) for the investment in the new machine is:
Give your answer to one decimal place.
A project requires an initial investment of $50,000. It will generate positive cash flows for two years as follows.
The cost of capital is 12% per year.
What is the equivalent annual net present value of the project?
Give your answer to the nearest $10.
Place each method of analysing risk and uncertainty against the statement that describes it correctly.
Company S has two divisions, X and Y. Division X transfers 50,000 component units to Division Y each quarter. The market price of the component is $20. Division X's variable cost is $10 per unit and its fixed cost is $150,000 each quarter.
What price would be credited to Division X for each component that it transfers to Division Y under:
two-part tariff pricing (where the two divisions have agreed that the fixed fee will be $100,000); and dual pricing (based on market price and marginal cost).
Which of the following statements is NOT correct?
Transfer prices between responsibility centers should be set at a level that:
S is considering launching a new product.
The variable costs of manufacturing the product will be $6 per unit.
The product must be manufactured in batches of 2,000 units. The machine set up cost for each batch will be $4,000.
Maximum capacity will be 8,000 units each year.
Market research has shown that the unit selling price will affect the demand for the product as follows.
Which unit selling price will maximise annual profit?
A company is classifying its quality costs to prepare a quality cost report. Which of the following are conformance costs?
Select ALL that apply.
An organization uses a balanced scorecard approach to performance measurement, both at the corporate level and to assess the performance of each of its responsibility centre managers.
Which THREE of the following statements are valid in respect of the effect of this approach on the behavior of the responsibility centre managers?
The starting point for developing a balanced scorecard for an organization should be:
Juan is looking to invest in the mining industry. He has narrowed his options down to two rival companies, both with sales of £200m. Company A has an EBIT of £10m whereas Company B has an EBIT of £14m.
This would suggest that Company B is the better investment but Juan is suspicious that Company B has more financial backing than Company A.
Which ratios will tell him which company will use his investment the best?
Residual income is an appropriate performance measure for which type of responsibility centre?
For a pharmaceutical manufacturer, in which perspective of the Balanced Scorecard should the performance measure 'number of patents granted during the year' be included?
Three years ago the large number of faulty products being returned by its customers resulted in a company adopting total quality management (TQM). The company has increased expenditure on staff training and product inspections. This has resulted in a reduction in the number of faulty products returned.
Which of the following statements is correct?
Product WB currently sells for $13 per unit. Annual demand at that price is 20,000 units. If the price increases to $15, the annual demand falls by 500 units.
What is the formula for the demand curve?
The following calculation of the net present value (NPV) of a project has been produced.
By how much can the forecast revenue decrease before the project is not viable?
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:
SDF is a newly-established production company that is experiencing high staff turnover in its factory. The production department is studying the manufacturing process and its associated learning curve.
Which of the following statements is correct?
There is a 60% probability of a project yielding a positive net present value (NPV) of $280,000 and a 30% probability of it yielding a positive NPV of $140,000.
The only other possible outcome is that the project will yield a negative NPV of $160,000.
What is the expected value of the project's NPV?
A manufacturing company has just developed a new product and must now determine the most appropriate pricing strategy for its initial launch.
The product will initially be unique because it will include highly desirable features that no competitive product offers. Its development has involved substantial expenditure and the company wishes to recover this as soon as possible.
The product's uniqueness is expected to last for only six months before a competitor launches a similar product. It is expected that the competitor will avoid any significant development costs by reverse engineering the company's own product.
At that point, to remain competitive, the company must ensure that its selling price matches that of the competitor.
Which of the following pricing strategies would be most suitable for the initial launch of the company's product?
An investment appraisal has identified that a project has a positive net present value when discounted at the company's cost of capital. If the cost of capital is now increased, indicate whether each of the following appraisal measures will increase, decrease or stay the same.
A company is considering investing $150,000 in a project which will generate the following contributions during the first three years.
Tax depreciation allowance is 25% each year of the reducing balance.
The taxation rate is 30% of taxable profits and tax is payable in the year after that in which it arises.
To the nearest $10, what is the forecast total project cash flow in year 3?
A company is determining the selling price for its new product.
At a selling price of $16 per unit there will be zero demand but for every $1 reduction in the price, demand will increase by 100 units per period.
Production must be in batches of 100 units. The variable cost per unit will be $8 if 400 units are produced in a period. For each additional batch produced in a period the variable cost per unit will increase by $1 per unit for the additional batch only.
No inventories will be held.
Which of the following sales and production volumes will generate the highest contribution per period?
SQ has the opportunity to invest in project X. The net present value for project X is $12,600. Cash inflows occur in years 1, 2 and 3. The company's cost of capital is 14%.
Calculate the annualized equivalent annuity of project X.
Give your answer to the nearest whole $.
IOP's product is manufactured using a production process that is known to have a defect rate of 10%.
IOP's quality control department has developed a test that has a 98% probability of classifying a non-defective item correctly and a 2% probability of classifying a non-defective item as defective.
The same test has a 95% probability of classifying a defective item correctly and a 5% probability of classifying a defective item as non-defective.
Calculate the proportion of IOP's output that will be classified as non-defective by the quality control department's test.
Give your answer to one decimal place.
Place the correct quality cost classification against each cost described below.
$30.328 million is to be invested in a project that will yield annual net cash inflows of $8 million for 5 years.
What is the project's internal rate of return (IRR)?
Give your answer to the nearest whole percentage.
9 %, 10 %, 11 %
Which of the following is the ideal basis to use for a transfer price when there is a perfect external market?