1. An engineering company is thinking about implementing activity-based management principles.

Which of the following is a correct definition of activity-based management? Select the ONE definition
that applies.
(i)

ABM is an approach to the costing and monitoring of activities which involves tracing resources
consumption and costing final outputs. Resources are assigned to activities and activities to cost
objects based on consumption estimates. The latter utilise cost drivers to attach activities costs to
outputs.

(ii)

ABM involves the identification and evaluation of the activity drivers used to trace the cost of activities
to cost objects. It may also involve selecting activity drivers with potential to contribute to the cost
management function, with particular reference to cost reduction.

(iii) ABM is a method of budgeting based on an activity framework and utilising cost driver data in the
budget setting and variance feedback processes.
(iv) ABM is a system of management which uses activity-based cost information for a variety of purposes
including cost reduction, cost modelling and customer profitability analysis.
(v)

ABM is a grouping of all cost elements associated with an activity.

2. AB plc is a supermarket group which incurs the following costs:

(i)

The bought-in price of the good

(ii)

Inventory financing costs

(iii) Shelf refilling costs

(iv) Costs of repacking or 'pack out' prior to storage before sale.
AB plc's calculation of Direct Product Profitability would include:
A

All of the above costs

All of the above costs, except (ii)

All of the above costs, except (iv)

Costs (i) and (ii) only

Cost (i) only

3. The adoption of JIT normally requires which one of the following factors to increase?
A

Inventory levels

Work-in-progress levels

Batch sizes

Quality standards

4. Match the cost to the correct cost category:

Costs
(a)

Reliability studies

(b)

Repairing returned items

(c)

Quality audits

(d)

Quality control investigations of failures

Hashan Madushanka

P2

Cost categories

Prevention costs

Appraisal costs

Internal failure costs

External failure costs

5. Use the words and phrases in the table provided below to complete the following
paragraphs:
output
quality
production problems
Total Quality Management (TQM)

customer goodwill

delays

buffer inventory

quality

In a company operating on JIT principles, the absence of inventories deprives production of a safety
net or '______________________'. This exposes the business to production problems or
_______________________ and, ultimately, to lost sales and
damaged________________________.
In this context, the adoption of a ________________________ philosophy is key. In this,
_______________________ is a feature rooted in the production process and every individual is
responsible for the quality of his/her __________________________.
This will encourage good quality at all times and therefore minimise________________________ that
would otherwise occur due to poor ___________________________.
6. The following data relates to three products manufactured by BJS Ltd:
Product
X

Product
Y

Product
Z

$12

$16

$14

$3

$10

$7

15,000

40,000

20,000

1.5

Selling price per unit

Direct material cost per unit
Maximum demand (units)
Time required on the bottleneck (hours per unit)

The firm has 80,000 bottleneck hours available each period, and total factory costs amount to
$100,000 in the period.
Task: Calculate the following:
The TPAR (throughput accounting ratio) for Product X
The TPAR (throughput accounting ratio) for Product Y
The TPAR (throughput accounting ratio) for Product Z
The maximum profit achievable by BJS, in $ (this involves a calculation
of the optimum product mix).

7. The selling price of product Z is set at $250 for each unit and sales for the coming year are
expected to be 500 units.

Hashan Madushanka

P2

If the company requires a return of 15% in the coming year on its investment of $250,000 in product
Z, the target cost for each unit for the coming year is:
A

$145

$155

$165

$175

$185

8. Casabee was established in 2010 and manufactures a range of kitchen utensils, which it makes
from material purchased from a number of suppliers. The recently appointed Managing Director has
expressed increasing concern about the trends in falling sales volumes, rising costs and hence
declining profits over the last two years.
There is general agreement amongst the managers of Casabee that these trends are the result of the
increased intense competition that has emerged over the last two years. Casabee continues to have a
reputation for high quality, but this quality is now being matched by the competition.
The competitors are taking Casabee's share of the market by selling equivalent products at lower
prices. It is thought that in order to offer such low prices, the production costs of the competitors must
be lower than Casabee's. Its MD is now proposing the following to improve sales volumes, costs sand
profits:
(i)

We must enter a Value Analysis exercise. Value Analysis is a cost reduction and problem solving
technique that analyses an existing product, in order to identify and reduce or eliminate any costs
which do not contribute to value or performance.

(ii)

We must enter a Value Analysis exercise. Value Analysis focuses on the value to the customer of each
function of the product, and consequently allocates resources to those functions from which the
customer gains the most value.

(iii) We also must enter a Functional Cost Analysis exercise. Functional cost analysis is a method that can
be applied to examine the component costs of a product or service, in relation to the value as
perceived by the customer. Functional cost analysis can be applied to new products, and breaks the
product down into its component parts. For example, a kitchen utensil may have the function to be
dishwasher- and microwave-safe, and therefore require less manual cleaning.
(iv) Both value analysis and functional cost analysis have potential to help Casabee, but Value Analysis is
likely to be a more useful technique, because kitchen utensils are products that are sold more on the
basis of their use value, rather than their esteem value.
Which of the foregoing arguments are valid?
A

(i), (iii) and (iv)

(i), (ii), (iii) and (iv)

(i) and (iii)

(ii) and (iv)

9. A company has carried out extensive product research and, as a result, has just launched a new
innovative product unlike anything else that is currently available on the market. The company has
launched this product using a market skimming pricing policy, i.e. charging very high prices initially.
The market in which it operates is highly competitive and historically success has been achieved by
being the first to market with new products. Only a small number of companies have survived in the

Hashan Madushanka

P2

market, and those that remain are constantly aiming to develop new products either by improving
those already in the market, or by extensive product research.
Select ALL that apply:

In the introduction stage, the product is unique and therefore the company can charge a high price.

In the introduction stage, competitors will buy the product to carry out reverse engineering and see
how the product works, so that they can develop their own similar, but different product.

In the introduction phase, the company will seek to avoid this competition by maintaining its selling
price at the end of the introduction stage.

In the growth stage, the company will adopt a lower selling price to continue to attract new purchasers
of the product.

In the growth stage, if the product cannot be differentiated in other ways, the company may need
further reductions in selling price to maintain growth.

The growth stage is the ideal time to offer short term one-off offers or discounts for multiple purchases.

In the maturity stage, the selling price of the product becomes unstable and the product is not
financially viable anymore.

In the decline stage, the product may continue to be sold, provided its margin is positive.

If the product's margin is not positive in the decline phase, the product may be bundled with other
products or sold for less than its unit cost in order to clear the company's inventory of what has become
an obsolete product.

10. Average unit times for product Alpha have been tabulated as follows:
Unit number
Average time per unit Yx
1
120 minutes
2
4
8
16
Required:
What is the Learning Curve rate?

Total time

1,375.52

11. Average unit times for product X have been tabulated as follows:
Unit number
Average time per unit Yx
1
20 minutes
2
17.2 minutes
4
14.792 minutes
8
12.72 minutes
Required:
What is the Learning Curve rate?
12. Department F assembles widgets by hand. A new product line commenced last week. The first
widget produced took five hours. The labour hours were fully utilised making 2,000 widgets in the first
week of production. No additional labour hours are available in the short term.
Note: the department bases its learning curve calculations on the model:
0.23
y = a.x
How many units were produced in the second week?

Hashan Madushanka

P2

13. You are the management accountant of a new small company that has developed a new product
using a labour-intensive production process. You have recently completed the budgets for the
company for next year and, before they are approved by the Board of Directors, you have been asked
to explain your calculation of the labour time required for the budgeted output. In your calculations,
you anticipated that the time taken for the first unit would be 40 minutes and that 75% learning curve
would apply for the first 30 units.
The expected time for the 6th unit of output is ___________________ minutes.
(Note: 2 decimal places please. The learning index for a 75% learning curve is 0.415.)

13. Use the words and phrases in the table provided below to complete the following
paragraphs:
doubled

cumulative

less

labour intensive

reduction

fall

doubled

constant

doubled

It has been observed in some industries, particularly where skilled labour predominates such as in
aircraft manufacture, that as more of the same units are produced, there is a
______________________ in the time taken to manufacture them until the learning process is
complete.
A learning curve is the mathematical expression of the phenomenon that when complex and
_______________________ procedures are repeated, unit labour times tend to decrease at a
_______________________ rate.
The learning curve phenomenon states that each time the number of units produced is
_____________________, the _________________________ average time per unit is reduced by a
constant percentage. If this constant reduction is 20%, this is referred to as an 80% learning curve,
and a 10% reduction as a 90% learning curve. This is an important phenomenon that has been
empirically observed. The ______________________ average time is the average time per unit for all
units produced up to the present time, including right back to the very first unit made.
If, for instance, there is a 60% learning curve, the cumulative average time per unit of output will
_______________________ to 60% of what it was before, every time output is
_______________________.
14. A school is preparing its budget for 2015. In previous years, the Headmaster has prepared the
school budget without the participation of senior staff (heads of departments), and presented it to the
Board of Governors for approval.
In 2013, the Board of Governors criticised the Headmaster over the lack of participation of his senior
staff in the preparation of the 2014 budget, and requested that for the 2015 budget, the senior staff
were to be involved.
Task: Answer 'TRUE' or 'FALSE' to the following:
Involvement would encourage heads of department to be motivated to
achieve their targets, because they would take ownership of their
budget.

Hashan Madushanka

P2

The participative process is not time consuming, so there is no risk of

the availability of the budget for 2015 being delayed.
Heads of departments may agree among themselves to include
unnecessary expenditure (budgetary slack) so that it is easier for them
to achieve the cost targets they have set.
Even with involvement, heads of departments would not feel that they
are being respected for the value that their experience brings to the
running of the school.
15. Nielsen Ltd has 2 divisions with the following information:
Division A
Profit
Capital employed
ROCE

$
90,000
300,000

Division B
$
10,000
100,000

30%

10%

Division A has been offered a project costing $100,000 and giving returns of $20,000. Division B has
been offered a project costing $100,000 and giving returns of $12,000. The company's cost of capital
is 15%. Divisional performance is judged on ROCE and the ROCE-related bonus is sufficiently high to
influence the managers' behaviour.
Which of the following statements are TRUE? Select ALL that apply.

Both divisional managers should accept the project offered to them.

If he/she acts in the best interests of their own division, only the manager of Division A will want to
accept the project offered to him/her.

If he/she acts in the best interests of their own division, only the manager of Division B will want to
accept the project offered to him/her.

ROCE is a good decision-making method and in this case, will guarantee that the correct decision will
be made by both divisional managers.

If managers want to act in the best interests of the business as a whole, only the manager of Division A
should accept the project offered to him/her.

16. The manager of a trading division has complete autonomy regarding the purchase and use of
non-current assets. The division operates its own credit control policy in respect of customers but the
group operates a central purchasing function through which the division places all orders with
suppliers and invoices are paid by head office.
Inventories of goods for sale are kept in central stores, from which local divisions call off requirements
for local sales on a monthly basis into a local inventory.
Divisional performance is assessed on the basis of controllable Residual Income. The company
requires a rate of return of 'R'.
Using the following symbols:
Divisional non-current assets
N
Apportioned net book value of central stores
S
Divisional working capital
Receivables
D
Local Inventory
I

Hashan Madushanka

P2

Bank
Payables

B
(P)

Divisional net assets

Divisional contribution
Controllable fixed costs
Head Office charges

C
(F)
(H)

Divisional net income

Which ONE of the following formulae calculates the division's controllable residual income?
(i)

[C F] [(N + D + B - P) R]

(ii)

[C F] [(N + D + I + B - P) R]

(iii) C [(N + D) R]
(iv) G (T R)
A

(i) only

(ii) only

(iii) only

(i) and (iv) only

17.
A
$20,000
$200,000
$100,000

PBIT
Sales
Capital employed

B
$1,000,000
$2,000,000
$10,000,000

For companies A and B, which of the following statements are true?

1. Company A has a higher ROCE than company B
2. Company B has a higher ROCE than company A
3. Company A is more profitable than company B
4. Company A is better utilizing the funds invested in it than company B
A. 1, 3 and 4
B. 2 only
C. 1 and 4
D. None of these
18. Division W of Stoak Limited produced the following results in the last financial year:
Profit $200,000
Gross capital employed $1,000,000
For evaluation purposes all divisional assets are valued at original cost.

Hashan Madushanka

P2

A proposed project will increase the divisions profit by $22,000, but will require gross assets to
increase by $100,000. Stoak Limited imposes a 20% capital charge on its divisions.
Will the evaluation criteria of Return on Investment (ROI) and Residual Income (RI) motivate division
Ys managers to accept the project?
A. ROI Yes, RI Yes
B. ROI Yes, RI No
C. ROI No, RI Yes
D. ROI No, RI No
19. A company sells inventory for cash to a customer, at a selling price which is below the cost of the
inventory items. How will this transaction affect the current ratio and the quick ratio immediately after
the transaction?
A. Current ratio Increase, Quick ratio Increase
B. Current ratio Increase, Quick ratio Decrease
C. Current ratio Decrease, Quick ratio Increase
D. Current ratio Decrease, Quick ratio Stay the same
20. A division currently has an investment base of $5,200,000 and annual profits of $1,040,000. The
following additional investments are being considered.
Investment ($000)
Annual profit ($000)
Investment L
1,300
435
Investment M
870
192
Investment N
3,035
760
Which combination of investments will maximize the divisions return on investment?
A. L only
B. N only
C. L and N
D. L, M and N
21. Why might using ROCE as a performance metric encourage short term-behaviour
1. Cutting back on investment allows the value of the capital invested to fall
2. Investments that need an immediate cash outflow but takes time to produce profits will be
rejected.
3. The time value of money is not accounted for.
4. A good ROCE reflects on sufficient liquidity in the short term to medium term.
A. 1 and 2
B. 2 and 4
C. 1 and 3
D. 1, 2 and 4
22. Which of the following are reasons why using ROCE as a performance metric can be useful?
1. It is widely and easily understood.
2. The figures required are generally easily available.
3. It shows how well the business is utilizing the funds invested in it.
4. It can be meaningfully compared to the organisations cost of capital.
A. 1 and 2
B. 2 and 4

Hashan Madushanka

P2

C. 1 and 3
D. All of the above
23. A professional firm has two divisions, a computer consultancy division (CSD) and a management
advisory division (MAD). Each division provides consultancy and advisory services to clients and in
the year just ended, the fees earned by CSD were $500,000 and the fees earned by MAD were
$700,000. Establishment costs were $400,000 for the year in CSD and $500,000 for the year in MAD.
In providing services to their clients, each division obtains supporting services from the other division.
During the year, CSD provided 5,000 hours of services to MAD and MAD provided 2,000 hours of
services to CSD.
It has been agreed that the transfer prices for services should be $20 per hour for work done by CSD
and $30 per hour for services provided by MAD.
Required:
The profit for the year reported by CSD was:
A

$60,000

$100,000

$140,000

$200,000

24. Hock Group has two divisions, Division P and Division Q. Division P manufactures an item that is
transferred to Division Q. The item has no external market, and 60,000 units produced are transferred
internally each year. The costs of each division are as follows:
Division P
Division Q
Variable cost
$10 per unit
$12 per unit
Fixed costs each year
$120,000
$90,000
Head office management decides that a transfer price should be set that provides a profit of $30,000
to Division P. What should the transfer price per unit be?
25. Division A transfers 100,000 units of a component to Division B each year. The market price of the
component is $25. Division As variable cost is $15 per unit, and A's divisionals fixed costs are
$500,000 each year.
What price would be credited to Division A for each component that it transfers to Division B under:
Dual pricing (based on marginal cost and market price)?
Two-part tariff pricing (where the Divisions have agreed
that the fixed fee will be $200,000)?
26. Market research by Company A has revealed that the maximum demand for product R is 50,000
units each year, and that demand will reduce by 50 units for every $1 that the selling price is
increased. Based on this information, Company A has calculated that the profit-maximising level of
sales for product R for the coming year is 35,000 units. The price at which these units will be sold is:
A

$100

$300

$500

$700

$900

Hashan Madushanka

P2

27. Another product manufactured by company A is product M. At a price of $700 for product M there
would be zero demand, and for every $40 reduction in the selling price the demand would increase by
100 units. The variable cost of producing a unit of product M is $60.
Company A knows that if the demand equation for product M is represented by p = a bx, where p is
the selling price and x is the quantity demanded at price p, then the marginal revenue (MR) for
product M can be represented by MR = a 2bx.
The profit-maximising output of product M is:
A

100 units

700 units

800 units

1,600 units

1,750 units

28. A company is considering the pricing of one of its products. It has already carried out some market
research with the following results:
The quantity demanded at a price of $100 will be 1,000 units.
The quantity demanded will increase/decrease by 100 units for every $50 decrease/increase in the
selling price. The marginal cost of each unit is $35.
Calculate the selling price that maximises company profit.
29. H is launching a new product which it expects to incur a variable cost of $14 per unit. The
company has completed some market research to try to determine the optimum selling price with the
following results.
If the price charged was to be $25 per unit, then the demand would be 1,000 units each period. For
every $1 increase in the selling price, demand would reduce by 100 units each period. For every $1
reduction in the selling price, the demand would increase by 100 units each period.
Calculate the optimum selling price.
30. Identify the correct description of imperfect information:
A

costs more to collect than its value to the business

is available only after preliminary decisions on a business venture have been taken

does not take into account all factors affecting a business

may contain inaccurate predictions

31. A company is considering investing in one of the following projects.

Project

Expected
value
$000

Standard
deviation
$000

850

500

1,200

480

150

200

660

640

Hashan Madushanka

P2

10

It wishes to select the project with the lowest risk factor. Identify which project should it select:
A

Project A

Project B

Project C

Project D

32. Three investors are considering the same investments. The net returns from the investments
depend on the state of the economy and are illustrated as follows:
State of the economy

Returns from investment

A
$

Probability
of
economic state

B
$

C
$

Good

6,000

14,000

3,000

0.1

Fair

5,000

3,000

5,000

0.4

Poor

4,000

500

8,000

0.5

Details on the attitudes to risk of the three investors is as follows:

Micah is risk neutral

Zhang is a risk seeker

Jill is risk averse and typically follows a minimax regret strategy with her investments

Calculate which investment would be best suited to each investor's risk attitude.
33. A company can make either of two new products, X and Y, but not both. The profitability of each
product depends on the state of the market, as follows:
Market state

Profit from
product

Probability
of
market state

X
$

Y
$

Good

20,000

17,000

0.2

Fair

15,000

16,000

0.5

Poor

6,000

7,000

0.3

Calculate the expected value of perfect information as to the state of the market
A

$0

$600

$800

$1,000

34. A product is manufactured in a two-stage process, the stages being designated A and B.
Each process has two machines, named A1 and A2 for process A, and B1 and B2 for process B.

Hashan Madushanka

P2

11

Each unit of finished product must pass through either one of the two machines in process A, and
then through either one of the two machines in process B. (50% go through A1 and 50% through A2.
Similarly for B1 and B2.)
How many different ways may a product be manufactured?
The probabilities of a defective product from each machine are as follows: 2% for A1, 6% for A2, 4%
for B1, 2% for B2. The defectives are thrown out as they occur.
What is the probability of a perfect item being produced?
The total production is 10,000 items started every year. The loss on each defective item is $10, and
the profit on each item is $80.
$
The expected net profit is
35. Chen Products produces four manufactured products: Products 1, 2, 3 and 4. The companys risk
committee recently met to discuss how the company might respond to a number of problems that
have arisen with Product 2.
After a number of incidents in which Product 2 had failed whilst being used by customers, Chen
Products had been presented with compensation claims from customers injured and inconvenienced
by the product failure. It was decided that the risk committee should meet to discuss the options.
When the discussion of Product 2 began, committee chairman Anne Ricardo reminded her colleagues
that, apart from the compensation claims, Product 2 was a highly profitable product.
Chens risk management committee comprised four non-executive directors who each had different
backgrounds and areas of expertise. None of them had direct experience of Chens industry or
products. It was noted that it was common for them to disagree among themselves as to how risks
should be managed and that in some situations, each member proposed a quite different strategy to
manage a given risk. This was the case when they discussed which risk management strategy to
adopt with regard to Product 2.
Using the TARA framework, place each of the following strategies in a grey cell, against the 'TARA'
element to which it is most likely to relate:
Transfer
Avoid
Reduce
Accept
Strategy 1: this would involve discontinuing the
activity that is exposing the company to risk. In
the case of Chen, this would involve ceasing
production of Product 2.
This would be pursued if the impact (hazard) and
probability of incurring an acceptable level of
liability were both considered to be unacceptably
high and there were no options for transference or
reduction.

Strategy 2: this would involve the company

accepting only a portion of the risk. Although an
unlikely possibility given the state of existing
claims, insurance against future claims would
serve to limit Chens potential losses and place a
limit on its losses. Outsourcing manufacture may
be a way of transferring risk if the outsourcee can
be persuaded to accept some of the product
liability.

Hashan Madushanka

P2

12

Strategy 3: This would involve seeking to retain a

component of the risk (in order to enjoy the return
assumed to be associated with that risk) but to
reduce it and thereby limit its ability to create
liability. Chen produces four products and it could
reconfigure its production capacity to produce
proportionately more of Products 1, 3 and 4 and
proportionately less of Product 2. This would
reduce Product 2 in the overall portfolio and
therefore Chens exposure to its risks. This would
need to be associated with instructions to other
departments (e.g. sales and marketing) to
similarly reconfigure activities to sell more of the
other products and less of Product 2.

Strategy 4: This would involve taking limited or no

action to reduce the exposure to risk and would
be taken if the returns expected from bearing the
risk were expected to be greater than the
potential liabilities. The case mentions that
Product 2 is highly profitable and it may be that
the returns attainable by maintaining and even
increasing Product 2s sales are worth the
liabilities incurred by compensation claims.

36. Which of the following is NOT an intangible cost of a new information system?
A

The opportunity cost of other projects foregone

Day to day running costs such as heating and insurance

Staff disruption during the implementation phase

The cost of dysfunctional behaviour due to resistance to change

37. Indicate whether, in a comparison of the NPV and IRR techniques, the following statements
are true or false.
True
False
Both methods give the same accept or reject decision,
regardless of the pattern of the cash flows
IRR is technically superior to NPV and easier to calculate
The NPV approach is superior if discount rates are expected
to vary over the life of the project
NPV and accounting ROCE can be confused

38. What are the disadvantages of the payback method of investment appraisal?
I. It tends to maximize financial and business risk
II. It is a fairly complex technique and not easy to understand
III. It cannot be used when there is a capital rationing situation
A None of the above
B All of the above
C I only
D II and III
39. A company is considering four capital projects in which to invest. All of the projects are divisible,
which means that if the company invests in a fraction of a project, it will earn that fraction of the
expected returns.
Information about the projects is as follows:

Hashan Madushanka

P2

13

Cash flows
Year 0
Year 1
Year 2
Year 3
Year 4
PV of annual cash profits

Project W
$
(10,000)
3,000
6,000
8,000
8,000
17,340

Project X
$
(8,000)
7,000
5,000
3,000
2,000
13,200

Project Y
$
(18,000)
0
18,000
15,000
1,000
24,500

Project Z
$
(17,000)
0
27,000

25,860

If there is capital rationing in Year 0, and none of the project start times can be delayed beyond
year 0, how would the four projects be ranked in order of priority, starting with the most
desirable project first?
A
B
C
D

W, X, Y then Z
W, X, Z then Y
X, W, Z then Y
Z, Y, W then X

40. Complete the sentence using the following words below.

wait
abandon
follow on
An electronics company makes radios and is considering launching a new portable version which will
give the company a competitive advantage for three years. They would need to buy new capital
equipment for $400,000 which would have a scrap value of $60,000 in three years time. Launching
the radio would give the company opportunity to launch further models at a later date. This is an
option to ____________________. The opportunity to sell the capital equipment provides an option to
_______________________.
41. Briggs plc has analysed a particular risk faced by its Scarborough division on a risk map. It has
concluded that the matter has a low impact but there is a high probability of its occurrence.
Which of the following risk responses would be most appropriate?
A Risk avoidance
B Risk reduction
C Risk transfer
D Risk acceptance
42. Which of the following risks would normally be classified as operational risks (select all
that apply)?
A A merger between the business's sole supplier of one component and the business's main
competitor
B The insolvency of one of the business's fifteen suppliers of a particular component
C One of the business's most significant customers seeking to extend its credit period from 30 to 60
days
D One of the business's most significant suppliers transferring its manufacturing operations overseas
43. Which of the following is not a technique for measuring risk?
A Sensitivity analysis.
B Risk mapping.
C Variance.
D Standard deviation of expected returns.

Hashan Madushanka

P2

14

44. Claire Ltd is considering a project with the following revenue stream:
Year
Investment
Variable
Sales
Costs
$'000
$'000
$'000
0
(10,000)
1
(4,000)
9,000
2
(4,000)
9,000
3
(4,000)
9,000
The company's cost of capital is 5%.

Net cash
flows
$'000
5,000
5,000
5,000

By what percentage will sales have to fall for the project to produce a zero net present value?
A 14.8%
B 26.6%
C 33.2%
D 36.2%

45. Grenville Ltd is renewing its buildings and contents insurance policy covering its eight UK
factories.
In terms of risk management, this is an example of:
A Risk avoidance
B Risk reduction
C Risk transfer
D Risk retention
46. Risk mapping is a technique for assessing the severity of a risk and the probability or frequency of
its likely occurrence.
For what type of risk would it probably be most appropriate to take out an insurance policy
from an insurance company?
A Severity high, frequency high.
B Severity high, frequency low.
C Severity low, frequency low.
D Severity low, frequency high.
47. How is target cost calculated?
A Desired selling price actual profit margin
B Market price standard profit margin
C Market price desired profit margin
D Desired selling price desired profit margin
48. In relation to life cycle costing which of the following statements are false?
A
B

Life cycle costing is the profiling of costs over a product's production life.
Life cycle costing aims to minimise cost and maximise sales revenue over the life cycle of the
product.
C There are four typical stages in the life cycle of a product. These are 'introduction', 'growth',
maturity' and 'decline'.
D During the 'introduction' stage of the life cycle of a product, the product is likely to be a net user of
cash and profits are not expected.
E During the 'maturity' stage of the life cycle of a product, the product will be a cash generator and
any growth is likely to come from new uses.
49. A division of a service company is aware that its recent poor performance has been attributable to
a low standard of efficiency amongst the workforce, compared to rival firms. The company is adopting
a balanced scorecard approach to setting performance targets. As part of its objective of closing the
skills gap between itself and rival companies, the division's management has set a target of providing
at least 40 hours of training each year for all its employees.

Hashan Madushanka

P2

15

This is a performance target that reflects:

A
B
C
D

A finance perspective.
An internal process perspective.
A learning and growth perspective.
A customer perspective.

50. ABC Group has several divisions. Division A manufactures one type of product, a Unit, which it
sells both to external customers and also the Division B, another member of the ABC Group. The
Group's policy is to allow divisions the freedom to set transfer prices and choose their own suppliers.
ABC uses residual income (RI) to assess divisional performance with targets being set each year. The
group's cost of capital is 12% a year. For Division A the budgeted information for next year is as
follows:
Maximum capacity 200,000 units
External sales 160,000 units
External selling price $33 per unit
Variable cost $20 per unit
Fixed costs $1,200,000
Capital employed $3,600,000
Target RI $200,000
Division A needs to meet its Target RI and sets its transfer price at $20.20 accordingly. Division B,
based in a different country to A, needs 60,000 Units which it could purchase from Division A, but it
could also buy them from W Co at $20 per Unit. Division A is taxed at 50%, whilst Division B is taxed
at 30%.
By how much more would the group's profits increase if B bought from W rather than A?
The answer is $

Hashan Madushanka

P2

16