Second Midterm Material Flashcards
How do we estimate the Total Variable Cost per unit?
Total fixed costs + Total variable costs / Total units produced
What is Operation Leverage?
Operation Leverage is the rate in which fixed costs are related to sales. If there is a high fixed cost, there is opportunity to have a greater profit. If variable costs are higher, there is less opportunity for profit.
Contribution margin= Sales - variable costs.
What is the Margin of Safety?
In Break even analysis (accounting), margin of safety is how much output or sales level can fall before a business reaches its breakeven point.
What is the difference between Variable and Absorption costing?
The difference between the two methods is in the treatment of fixed manufacturing overhead costs
How do we calculate cost per unit in Variable Costing?
Take all of the variable costs + fixed manufacturing overhead and divide that by units
How do we understand price and quantity variances?
What isn’t used in manufacturing, eg if we have 11 flubal cranks and we use 10, then we have 1 flubal crank as a quantity variance
What is EVA?
Economic value added (EVA) is a measure of a company’s financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit
Net operating profit after taxes (NOPAT)
How do we calculate Return on Investment?
In order to calculate ROI, take the two components and divide sales margin by the investment turnover ratio. For example, if a company had sales of $100 million and income of $20 million, the sales margin would be $20 divided by $100 or 20 percent. In this example we’ll assign the firm invested capital of $350 million. The investment turnover ratio is sales divided by invested capital – $100 divided by $350 – or 29 percent. The ROI is sales margin divided by investment turnover – or, in this example, 20 percent divided by 29 percent – which equals 69 percent.
