Breakeven and Limiting Factor Analysis

Question 1

Breakeven point (BEP)

Answer 1

1) Contribution required to breakeven/contribution per unit

2) Total fixed costs/ Contribution per unit

Question 2

Contribution ratio

Answer 2

100% x Contribution per unit/ Sales prices per unit

Question 3

Breakdown revenue

Answer 3

1) Contribution required to breakeven/ Contribution ratio
2) Fixed costs /Contribution ratio
3) Breakeven point in units x sales price

Question 4

Margin of safety

Answer 4

1) Budgeted sales - breakeven sales

2) 100% x (Budgeted sales - Breakeven sales)/ Budgeted sales

Question 5

Sales volume to achieve target profit

Answer 5

(Fixed costs + required profit)/ Contribution per unit

Question 6

Accounting rate of return (ARR)

Answer 6

1) 100% x Av. accounting profit/ Initial investment

2) 100% x Av. accounting profit/ Average investment

Question 7

Average investment

Answer 7

(initial investment + scrap value) x 1/2

Question 8

Discounting formula

Answer 8

V x 1/(1+r)^n

Question 9

Annuity

Answer 9

series of identical cash flows for a number of years

Question 10

Perpetuity

Answer 10

identical annual cash flows that continue forever

Formula: cashflow x 1/r

Question 11

Net terminal value

Answer 11

cash surplus remaining at end of project after removing interest and capital repayments

Question 12

Discounted payback period (DPP)

Answer 12

time it takes for a project’s NPV to go from positive to negative

Question 13

Internal rate of return (IRR)

Answer 13

discount rate at which NPV is 0

Question 14

IRR formula:

Answer 14

a + (b-a) NPVa/NPVa-NPVb
~ a = lower discount rate
~ b = higher discount rate