10 Min

Question 1

Flow of a Cost System

Answer 1

Add

Question 2

MPC and MPS

Answer 2

MPC + MPS = 1

Question 3

Multiplier Effect: formula

Answer 3

Add

Question 4

Cost of Capital: Formula using Dividend Growth Mode

Answer 4

Required Rate Annual Dividend
of Return = ————————– + Dividend Growth Rate
Value per Share

Question 5

Formula: Marginal Propensity to Consume

Answer 5

Change In Consumption / Change In Income

Question 6

Reorder Point

Rogers Formula: calculated
multiplying daily demand, or average daily usage, by the lead time, or the number of days it takes to receive an order

Answer 6

The reorder point (RP) is the inventory level at which an order for the economic order quantity (EOQ) is placed. It is the level of inventory equal to (or less than) the units of demand during lead-time (DLT) plus any required safety stock (SS).

The formula for the reorder point is RP = DLT + SS, where DLT is average demand during the lead-time period and SS is safety stock

Question 7

Economic Order Qty.

Answer 7

Add Formula

Question 8

Capital Investments Evaluation Summary

Good for Quick a Review

Answer 8

The method that recognizes the time value of money (present and future values) by discounting the after-tax cash flows over the life of a project, given the company’s minimum desired rate of return, is the net present value method. This method determines whether the discounted cash flows of a given project equal or exceed the initial investment.

The internal rate of return, another discounted cash flow method, determines the discount rate at which the present value of the projected future cash flows exactly equals the initial cost of the investment. The IRR is then compared with the desired minimum rate of return.

Payback period is the length of time (“period”) required to recover (“pay back”) the initial cash outlay of a capital project computed as the initial investment divided by the annual cash flow from the investment.

Accounting rate of return is also a non-discounted method computed as the net cash flow less depreciation divided by the investment.

Question 9

Cost of “Per Check” cleared (good review)

Answer 9

Cost per check cleared = (D)(S)(i)
D = days saved in the collection process
S = average check size
i = daily interest rate or opportunity cost (5% ÷ 360 = .0139%)
Substituting the given information into the equation:
Cost per check cleared = 1.2 days × $1,000 × .0139% = $0.17 per check cleared

Since the cost of the service would be $.20 per check cleared, the Jones Company should not adopt this alternative.

Question 10

Economic Value Added

Answer 10

Economic value added (EVA) is after-tax operating income less the weighted average cost of capital (after tax) multiplied by the total assets minus current liabilities:

EVA = After-tax operating income - [WACC × (Total assets - Current liabilities)]