QUESTION: 53

It is often claimed that a two-part transfer pricing system offers a number of advantages to organizations which use it.

Which of the following statements is NOT an advantage of using a two-part transfer pricing system?

Transfers are made at the marginal cost of the supplying division and both divisions should be able to report profits from inter-divisional trading.
The receiving division is made aware of and charged for the full cost of obtaining intermediate products from other divisions.
It stimulates planning, communication and coordination amongst divisions.
The agreed fixed fee simply compensates the supplying division for incurring the fixed costs associated with the item transferred.

Answer(s): D

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QUESTION: 54

Endure Co. makes 1,000 units ofX and 2,000 units of Y.

Costs for X: Material $4, labour $8, direct overhead $2, fixed cost $4.

Costs for Y: Material $9, labour $9, direct overhead $4, fixed cost $6.

Selling price for X and Y are S19 and $25 respectively. Another company can sell ready made product X and product Y's to Endure Co, this company sells X at $12 and Y at $21.
Advise Endure Co. on what would be the

most cost effective way to source products X and Y.

Endure should buy X and Yfrom the other supplier.
Endure should buy X but produce Y themselves.
Endure should produce both X and Y themselves.
Endure should buy Y but produce X themselves.

Answer(s): A

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QUESTION: 55

CORRECT TEXT
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.

1.2, 0.2

Answer(s): A

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QUESTION: 56

Which TWO of the following are reasons why cost-based approaches to transfer pricing are often used in practice?

The buying division will want to maximize its profits.
The transferring division will want to maximize its profits.
Because the external market is imperfect.
Because there is often no external market for the product that is being transferred.
The approach allows the organization to cover all the costs.

Answer(s): C,D

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