CIMA CIMA Certifications CIMAPRO19-P02-1 Questions & Answers

• Question 71:

  The directors of a company wish to evaluate two mutually exclusive capital investment projects. Both projects have conventional cash flows: an initial outflow followed by a series of annual cash inflows. The directors are aware of the following three investment appraisal methods: internal rate of return (IRR), net present value (NPV) and accounting rate of return (ARR). The directors have asked for your advice about which method should be used to evaluate these two projects. Which of the following is valid advice to give to the directors?

  A. IRR should be used because both NPV and ARR could lead to an incorrect investment decision.

  B. ARR should be used because it is based on profit whereas both IRR and NPV are based on cash flows.

  C. IRR should NOT be used because it could result in multiple IRRs.

  D. NPV should be used because it focuses on wealth creation whereas IRR and ARR are both relative measures.

  Correct Answer: D

• Question 72:

  A group consists of two divisions, Alpha and Beta, both of which are profit centers. Alpha sells a product to the external market and also sells it as an intermediate product to Beta. Beta then processes further before selling the final product to

  the external market. The current group transfer pricing policy requires Alpha to charge Beta with the variable cost of production.

  Which of the following statements is valid?

  A. A two-part tariff would provide a more effective basis for assessing divisional performance.

  B. A dual pricing approach to transfer pricing would increase Beta's total profit and reduce Alpha's.

  C. If Alpha has unfulfilled external demand then the transfer price should always be set at variable cost.

  D. Transfer prices only affect the assessment of performance of investment centres, not of profit centres.

  Correct Answer: A

• Question 73:

  The management of a leisure company, who are risk averse, have just approved an investment in a new amusement park. The country in which the amusement park will be located has a warm and mostly dry climate throughout the year. A number of specific risks related to this investment have been identified as follows.

  (1)

  Losses of very small amounts of revenue due to poor weather.

  (2)

  A significant financial liability may arise due to the injury of a member of the public.

  (3)

  Loss of several days of revenue due to rides being unavailable because of poor maintenance routines.

  (4)

  Income fraud as a consequence of the high levels of cash handled by employees.

  Using the TARA framework, which is the most appropriate way of managing each of these risks?

  A. Transfer risk 1; accept risk 2; avoid risk 3; reduce risk 4

  B. Accept risk 1; avoid risk 2; transfer risk 3; reduce risk 4

  C. Accept risk 1; transfer risk 2; avoid risk 3; reduce risk 4

  D. Reduce risk 1; transfer risk 2; avoid risk 3; accept risk 4

  Correct Answer: C

• Question 74:

  A company expects to sell 3,600 units of Product A at a selling price of $750 per unit during the forthcoming year. The currently expected variable cost per unit is $860 per unit. The company requires a return of 15% during the forthcoming

  year on its investment of $2.4 million in Product A. Absorbed general overheads are expected to amount to $40 per unit.

  What is the target cost for each unit of product A in the forthcoming year?

  A. $650

  B. $250

  C. $900

  D. $850

  Correct Answer: A

• Question 75:

  A company has just completed the production of the first 16 batches of a product. A learning curve has been observed throughout. The following table gives further details.

  

  To the nearest whole percentage, what rate of learning is implied?

  A. 87%

  B. 8%

  C. 84%

  D. 93%

  Correct Answer: C

• Question 76:

  Which of the following correctly defines the expected value of a project?

  A. The weighted average of the possible outcomes of the project.

  B. The actual amount of incremental wealth that the project will generate.

  C. The most likely amount of incremental wealth that the project will generate.

  D. The present value of the positive cash flows that the project will generate.

  Correct Answer: A

• Question 77:

  A risk averse decision maker will:

  A. accept a risk if it is accompanied by a satisfactory potential return.

  B. avoid all risks.

  C. accept a risk if the expected value of the potential outcomes is positive.

  D. always select the course of action that has the lowest risk.

  Correct Answer: A

• Question 78:

  Which of the following statements about learning curves is correct?

  A. The learning index for an 80% learning curve is calculated as log 2 divided by log 0.8.

  B. The learning index for an 80% learning curve is calculated as log 0.8 divided by log 2.

  C. A 90% learning curve indicates a faster rate of learning than an 80% learning curve.

  D. The learning index will always have a positive value.

  Correct Answer: B

• Question 79:

  A company is considering the replacement of its outdated information system. Which of the following are appropriate approaches for the company to take to assess the potential qualitative benefits of a replacement information system?

  (1)

  Ignore the qualitative benefits that may arise because there is too much subjectivity involved in their assessment.

  (2)

  Attempt to attribute monetary values to each of the qualitative benefits identified.

  (3)

  Acknowledge the existence of qualitative benefits and attempt to assess them in a reasonable manner that is acceptable to all parties.

  (4)

  Attempt to express qualitative benefits in general terms linked to a hierarchy of organizational objectives.

  A.

  (1), (2) and (3) only

  B.

  (1), (2) and (4) only

  C.

  (1), (3) and (4) only

  D.

  (2), (3) and (4) only

  Correct Answer: A

• Question 80:

  A company has just launched a new product at a selling price that is designed to rapidly gain market share and to discourage other competitors from entering the market. Which pricing strategy is the company using?

  A. Penetration pricing

  B. Loss leader

  C. Market skimming

  D. Premium pricing

  Correct Answer: A