CIMA CIMAPRO19-P02-1 Exam Dumps

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.

IOP's product is manufactured using a production process that is known to have a defect rate of 10%. IOP's quality control department has developed a test that has a 98% probability of classifying a non- defective item correctly and a 2%

probability of classifying a non-defective item as defective. The same test has a 95% probability of classifying a defective item correctly and a 5% probability of classifying a defective item as non-defective.

Calculate the proportion of IOP's output that will be classified as non-defective by the quality control department's test.

Give your answer to one decimal place.

A. 99.4 %

A company currently absorbs production overheads based on labor hours. The overheads absorbed by the two products that are made, L and M, are $4 per unit and $10 per unit respectively. These were based on the budgeted overheads of

$7,000 and budgeted labor hours of 1,750. The budgeted output was 500 units of each product.

The company is investigating the use of activity based costing (ABC). Analysis has shown that the total production overheads of $7,000 are made up of $4,000 for set up costs and $3,000 for inspection costs. The cost driver for set up costs is

the number of set ups and for inspection costs it is the number of inspections.

The cost driver rate for set ups is $160 per set up. Product L would need 5 production runs. Both types of product would need 1 set up for each production run. Product L would need 2 inspections for each production run. Product M would

need 1 inspection per production run.

The products are made in the same department and use the same equipment and staff but they are produced separately.

Which of the following statements are correct?

Select ALL that apply.

A. The current production overhead absorption rate is $4.00 per hour.

B. The current production overhead absorption rate is $500 per hour.

C. If ABC was used, set up costs per unit of Product L would be $1.60.

D. If ABC was used, set up costs per unit of Product M would be $4.00.

E. If ABC was used, inspection costs per unit of Product L would be $4.00.

F. If ABC was used, inspection costs per unit of Product M would be $4.00.