The plastics division of Ladmar has just reported a divisional return on capital employed of30% for the last twelve months. The capital employed in the plastics division is $1,200,000.The company’s overall return on capital employed is 18%, and the overall cost of capital is14%. The plastics division’s cost of capital is 13%.What is the plastic division’s residual income?
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1 .Two divisions within an organisation have autonomy to decide whether to trade with eachother or not, and to negotiate transfer prices. The selling division sells its output externally atthe external market price, and there is sufficient external demand to ensure that the sellingdivision could sell all that it can produce to external customers. A transfer price has beenagreed between the two divisions that is below the external market price.Which of the following is the most likely reason for making internal transfers at lessthan the external selling price of the selling division?
A Head office has imposed the transfer price B The management of the selling division are seeking to restrict the quantity produced C Some additional costs are incurred on external sales D The transfer price has been set to allow the buying division to compete throughlower prices
2 .Which of the following statements about transfer pricing is correct?
A Cost based transfer prices encourage the transferring division to control costs B The transferring division’s profit can be maximised at a transfer price below marketprice C Market based transfer prices always maximise overall company profits D The basis used to calculate transfer price will not...
3 .Division Sell is operating at full capacity producing component XBD2 which it sellsexternally for $8.00 per unit. The variable cost of production is $5 per unit. Another internaldivision, Division Buy is negotiating a transfer price for purchasing component XBD2 fromDivision Sell. Because of saved transport costs, the variable cost of producing componentXBD2 for Division Buy would be $4.50 per unit.What is the minimum transfer price that Division Sell should accept for transferringcomponent XBD2 to Division Buy?
A $4.50 per unit B $5.00 per unit C $7.50 per unit D $8.00 per unit
4 .Melton Co has many divisions which it evaluates using Return on Investment (ROI) andResidual Income (RI) measures. The Mowbray division has net assets of USD24 million at 30September 2014. In the year to 30 September 2014 it earned profit before interest and tax of USD3.6 million. The appropriate cost of capital for the Mowbray division is 12%.During the year to 30 September it paid interest of $0.6 million.What are the ROI and RI for the year to 30 September 2014?
A ROI 12.5%; RI USD0.12 million B ROI 12.5%; RI USD0.72 million C ROI 15%; RI USD0.72 million D ROI 15%; RI USD3 million
5 .Tom Hopkin is responsible for managing the volume, quality and cost of production withinhis responsibility centre.A new management accountant has suggested that the following performance measuresshould be included in assessing Tom’s performance:(1) Return on investment.(2) Materials usage variances.(3) Percentage of products that are defective after inspection.Which of the above performance measures would be appropriate for measuring Tom’sperformance?
A 1 and 2 only B 1 and 3 only C 2 and 3 only D All of the above
7 .In relation to residual income, which of the following statements is correct?
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A 1, 2 and 3 only B 1, 2 and 4 only C 1, 3 and 4 only D 2, 3 and 4 only
