Multiple Choice Questions:

1) A company may prefer to use residual income over return on investment for performance evaluation because:

A) Return on investment is absolute figure but residual income is a ratio.

B) Residual income is more likely to lead to goal congruence than return on investment.

C) It is easier to calculate residual income than return on investment.

D) Residual income considers three elements but return on investment considers only two elements.

2) When a division is operating at full capacity, the transfer price must be:

A) Based on opportunity cost.

B) A market-based transfer price.

C) A cost-based transfer price.

D) Total manufacturing cost.

3) Opportunity cost means:

A) Benefit received by selling goods on behalf of other division.

B) Benefit received by selling goods to one of the other divisions within the company.

C) Benefit foregone by purchasing goods at a price lower than its total manufacturing cost.

D) Benefit foregone by choosing an alternative course of action.

4) A market-based transfer price considers the ________ when determining the price.

A) Variable costs

B) Sales price of goods

C) Cost of the goods

D) Contribution margin

5) WAX-D Inc. has a division that manufactures a component that sells for $150 and has a variable cost of $45. Another division of the company wants to purchase the component. Fixed cost per unit of component is $25. What is the minimum transfer price if the division is operating at capacity?

A) $150

B) $45

C) $55

D) $140