BEC Deck #6 Flashcards
How does a firm maximize profits in a perfectly competitive industry?
How do you calculate economic profit?
MR must equal MC. MR is Price in a perfectly competitive industry.
Economic profit = TR-TC. TR=Price x units TC=Avg total cost x output
How do you calculate cost to allocate for normal & abnormal spoilage (ultimately, the debit to FG)?
Cost of normal spoilage should be absorbed by saleable units & included in finished goods while cost of abnormal spoilage is recognized in period. To calculate:
Total units produced, e.g.5000+200+300=5500
Good + normal spoiled = 5000+200=5200
allocate cost to good units = (5200/5500)99000=93,600
allocate cost to abnormal = (300/5500)99000=5400
What standard cost variance is least controllable by a production supervisor?
Overhead volume. 3 factors related to volume OH:
- ) OH volume variance is related to fixed OH. No volume variance for variable OH.
- ) Fixed OH is a function of estimated volume.
- ) OH volume variance occurs when actual production volume differs from estimated volume.
If a company acquires a new production machine, how do you calculate the discounted net of tax contribution margin?
Calculate margin - sales revenue less variable costs. Reduce for taxes. Apply the after tax CM to PV of an ord annuity for # of periods. Arrive at discounted net-of-tax contribution margin for the project.
What’s a key rationale/cause for the changing pattern of investment in agriculture by sovereign wealth funds?
To ensure food security in the event that crop shortages would result in an export ban, curtailing the ability to import crops.
What’s the current pattern of FDI?
Used to be slower growing developed nations investing in emerging markets. Now there’s been a shift and emerging markets are investing in developed economies. Lack of well functioning capital markets/local investment opps created funds to invest in technologies, brands, resources, better access to international markets, and use of technology to enhance productivity and gain western management skills.
How do you calculate absorption costs?
Mfg fixed costs are treated as product costs & assigned to units. Fixed costs follow units through WIP and FGs as inventoriable costs & are expensed through COGS when units are sold. Divide mfg fixed costs/# of units to get per unit FC. Add other variable & material/unit costs to get total per unit costs. Multiply total by # of units and subtract from sales. Subtract selling & admin.
How do you use the Gordon Growth Model to calculate the cost of capital?
Capital cost = Next dividend/Mkt price (1-Flotation cost) + dividend growth rate
What’s an example of a compliance objective per COSO?
Maintaining safe levels of carbon dioxide emissions during production to protect workers (per OSHA). (Refers to operating effectiveness/efficiency & financial statement reliability objectives).
How do you calculate breakeven point if given data for 2 products?
Total fixed costs need to be covered by the 2 products so add them together, e.g. 100K (prod 1) + 212K (prod 2). If prod 1 is 75% of sales and prod 2 is 25%, we know prod 1 is 3 times as many sales. Imagine products are sold in one package: 3x$10(SP prod 1)+$25(SP prod 2)=$55. Then VC: 3x$6(VC prod 1)+$13=$31. CM=55-31=$24. Breakeven units = FC/CM per unit. $312K/$24=13K units. 3 units of prod 1 in each package, so 3x13K=39K.
What’s one of the effects of rapid technological change on nations in the global economy?
Global labor arbitrage: Removing/reducing barriers to intl trade, causing jobs to move to nations where labor costs & cost of doing biz (due to factors like labor laws & environmental regs) is lower.
What’s most helpful for estimating the price at which goods might be sold in future years?
Current CPI. It’s more stable than the PPI.
Formulas for profitability index, IRR, NPV, PV of $1, EVA, and payback
NPV:
1.) Calc after tax cash flows = Ann net cash flow x (1-Tax Rate)
2.) Add deprn benefit = Deprn x tax rate
3.) Multiply result by appr PV of annuity
4.) Subtract initial cash outflow
Reult: NPV
Profitability Index: Prof index = PV of net future cash flow/PV of net initial investment (cost)
IRR: Accept when IRR>hurdle rate +NPV PI>1
Reject when IRR<1
EVA: NOPAT - $WACC
Payback: Payback pd = net initial investment/incr in annual net after-tax cash flow
Present Value of $1
PV=FV/(1+r)^n
FV=future value, r=rate, n=# of years
What are the formulas for ROI, RI, ROE, ROA, and Financial Leverage?
ROI = Income/Investment Capital or ROI = profit margin x investment turnover
RI = Net income (from IS) - required return
ROE = Net Income/Total Equity
ROA = Net income/Avg total assets
Financial Leverage = Avg total assets/equity
DuPont ROE: ROA x Financial Leverage
How do you calculate an amount in real terms after inflation?
Formula is Real$n=amount / (1+inflation rate)^n (n=# of pds)
How do you calc weighted annual interest rate for trade credit?
How much does it cost to hold money for extra days?
How do you get annual weighted interest rate?
E.g. 2% savings foregone divided by 98% (100-2). 2.041%
E.g. 30 day terms - 10 discount pd = 20. 360/20 = 18 20 day pds in yr. 1/3 of total purchase, e.g. 25/(25+50).
Formula: .02041x18x.3333=.12245
Add product 1 & product 2 contributions to get annual weighted interest rate.
If a firm is concerned with receiving all funds invested in a timely manner, they are concerned with
marketability and default risk.
If USD quoted at 120 yen on spot and 123 on 90 day forward contract, annual effect in forward mkt is
USD is at premium of 10%. Diff is 3 yen, over 360 day yr, diff of 3 yen translates to 12 yen (360/90=4*3=12), 10% of spot market quote of 120 yen.
APR of quick payment discount formula
Cash conversion cycle
Reorder point (inventory mgmt)
APR of quick payment discount: 360/pay pd-discount pd. x discount/(100-discount)%
Cash conversion cycle = inventory conversion pd + receivables collection pd - payables deferral pd
Reorder point = Safety stock + (lead time x sales during lead time in days/weeks)
If an input clerk enters an employee’s number and the computer responds with ‘employee # not assigned to active employee’, what type of check is this?
An existence check.
