Formulas

Question 1

Breakeven points in units

Answer 1

Fixed costs / Unit contribution margin

Question 2

Breakeven point in dollars

Answer 2

Fixed costs / contribution margin ratio

Question 3

Margin of safety

Answer 3

Excess of budgeted sales over breakeven

= planned sales / breakeven sales

Margin of safety ratio is the amount by which sales can decline before breakeven is reached

= margin of safety / planned sales

Question 4

Target income in units

Answer 4

(fixed costs + target op income)/ UCM

tells you how many units must be sold to achieve target op income

Question 5

Target net income

Answer 5

(fixed costs + (tgt net income /(1-tax rate))) / UCM

used to find after-tax income target

Question 6

Multiple product breakeven units

Answer 6

total fixed costs / (weighted avg SP - weighted avg var cost)

or

total fixed cost / weighted avg UCM

Question 7

Multiple product breakeven dollars

Answer 7

first calculate weighted avg CMR:
=weighted avg UCM / weighted avg SP

Then calc:
=total fixed costs / weighted avg CMR

Question 8

Price elasticity of demand

Answer 8

= % change in qty demanded / % change in price

Midpoint formula calculates elasticity across a range
=(abs(Q1 - Q2)/abs((Q1 + Q2)/2)) / abs((P1 - P2)/abs((P1 + P2)/2))
note: use absolute values for each component above

Question 9

Payback period

Answer 9

Only used if cash flows are constant

=initial net investment / annual expected cash flow

If cash flows inconsistent, calculation must be done cumulatively for each period

drawbacks - disregards cash flows after payback, and disregards time value of money

Question 10

Discounted payback method

Answer 10

Discounts each year of cash flow to calculate PV of each, and then looks at cumulative payback. Also called “breakeven time”. Addressed time value of money issue seen with basic payback period calculation.

Question 11

Payback reciprocal

Answer 11

= 1 / payback period

Sometimes used to estimate IRR

Question 12

Profitability index

Answer 12

= PV of future cash flows / net investment

method for ranking projects by highest discounted cash flows per dollar invested

Question 13

Cost of preferred stock capital

Answer 13

Annual dividend / net issue price

Question 14

Dividend discount model

Answer 14

Dividend per share

Divided by

(Cost of capital - dividend growth rate)

Question 15

Benefit of speeding up collections

Answer 15

(Daily receipts x reduced days) * opportunity cost of funds

Then subtract any costs in order to calculate net benefit/loss

Question 16

3 ways to calc avg AR

Answer 16

1. Daily credit sales x avg collection period
2. Net credit sales x (avg coll period / days in year)
3. Net credit sales / AR turnover

Question 17

Effective interest rate of compensating balance

Answer 17

(Annual rate x total borrowed) /(Total borrowed - comp balance)

Question 18

Calculate effective rate from stated rate

Answer 18

Stated rate / (1.0 - stated rate)