EJET is an airline company that operates domestically and internationally using a fleet of 20 aircraft. Passengers book flights using the internet or by telephone and pay for their flights at the time of booking using a debit or credit card.
EJET currently measures its performance using financial ratios. The new Managing Director has suggested that non-financial measures are equally important as financial measures and provide further insights into company performance.
Indicate the statements shown below that are valid:
A Non-financial measures are less likely to be manipulated than traditional financial ratios.
B Non-financial measures may discourage dysfunctional behaviour by airline staff.
C Financial ratios do not need to be linked with non-financial measures.
D Non-financial measures are a better indicator of future prospects than financial ratios which focus on the short term.
E Internal efficiency can be measured by the number of flight take-offs that are on time.
F Non-financial performance measures do not need to be developed and refined over time as they always remain relevant.
G Customer satisfaction can be measured in terms of the number of failed attempts to make a booking due to website crashes.
Summary financial statements are given below for JE, the division of a large divisionalised company:
The cost of capital for the division is estimated at 11% each year. The annual rate of interest on the long-term loans is 9%. All decisions concerning the division’s capital structure are taken by central management.
What is the divisional residual income (RI) for the year ended 31 December?
Perrin Co has two divisions, A and B.
Division A has limited skilled labour and is operating at full capacity making product Y. It has been asked to supply a different product, X, to division B. Division B currently sources this product externally for $700 per unit.
The same grade of materials and labour is used in both products. The cost cards for each product are shown below:
Product Y X
($)/unit ($)/unit
Selling price 600 –
Direct materials ($50 per kg) 200 150
Direct labour ($20 per hour) 80 120
Apportioned fixed overheads ($15 per hour) 60 90
Using an opportunity cost approach to transfer pricing, what is the minimum transfer price?
Division B of a company makes units which are then transferred to other divisions. The division has no spare capacity. The following statements have been made regarding the minimum transfer price that will encourage the divisional manager of B to transfer units to other divisions:
(1) Any price above variable cost will generate a positive contribution, and will therefore be accepted.
(2) The division will need to give up a unit sold externally in order to make a transfer; this is only worthwhile if the income of a transfer is greater than the net income of an external sale.
Which of the above statement(s) is/are true?
'The use of residual income in performance measurement will avoid dysfunctional decision-making because it will always lead to the correct decision concerning capital investments.'
To prevent dysfunctional transfer price decision-making, profit centres must be allowed to make autonomous decisions. True or false?
Which of the following is not a disadvantage of using market value as a transfer price?
The following information relates to an investment centre, which is a separate product division in a large company.
$
Net current assets 60,000
Non-current assets 240,000
Profit before depreciation 50,000
Depreciation 10,000
The company's cost of capital is 10%. What is the most appropriate measure of the centre's Return on Investment (ROI)?
SWAL has two divisions, SW and AL, which operate as profit centres and have full autonomy in making, buying and selling decisions.
SW manufactures SW+ at a cost of $12 per unit. The market price of SW+ is $16 per unit.
AL uses SW+ in manufacturing its own product. The transfer price of SW+ when transferred from Division SW to Division AL is set at full production cost plus 20%.
Which one of the following independent circumstances represents dysfunctional behaviour arising from SWAL's transfer pricing policy?
Michigan is an insurance company. Recently, there has been concern that too many quotations have been sent to clients either late or containing errors. The department concerned has responded that it is understaffed, and a high proportion of current staff has recently joined the firm. The performance of this department is to be carefully monitored.
Which ONE of the following non-financial performance indicators would NOT be an appropriate measure to monitor and improve the department’s performance?