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CIMA: BA2 > Section D: Decision making > Flashcards

Section D: Decision making Flashcards

1
Q

How to calculate breakeven point?

A

Fixed Costs / Unit contribution

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2
Q

How to calculate C/S or P/V ratio?

A

Contribution / Sales

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3
Q

How to calculate sales revenue at breakeven point?

A

Fixed costs / CS Ratio

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4
Q

How to calculate Margin of safety?

A

Budgeted sales units - breakeven sales units.

or

Budgeted sales - Breakeven sales / Budget sales

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5
Q

How to calculate sales volume to achieve target profit?

A

Fixed costs + Target profit / Contribution per unit

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6
Q

How to perform limiting factor analysis?

A

Step 1: Identify what is the limiting factor (Materials, Labour etc)

Step 2: Calculate Contribution earned by each product.

Step 3: Calculate contribution per unit of limiting factor (Cont per unit / labour hrs per unit)

Step 4: Rank the products

Step 5: Determine the optimal production plan

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7
Q

How to perform make or buy analysis?

A

Step 1: Identify limiting factor

Step 2: Compare relevant cost of producing vs cost of purchasing

Step 3: Calculate increase in cost by purchasing.

Step 4: Calculate additional cost of purchasing per unit of scare resource.

Step 5: Rank products based on what is the most expensive to purchase and target production to that product.

Step 6: Determine optimal production/purchase plan.

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8
Q

How to calculate means?

A

Grouped: Sum of X / Number of items

Ungrouped: Sum of X x Frequency / Number of items or Sum of X x Frequency / Sum of Frequency.

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9
Q

What is the mode? How to identify in grouped data?

A

Modal value is the most frequently occurring item.

In grouped data, the mode can be estimated from a histogram.

Step 1: Join with a straight line the top left hand corner of the highest bar in the histogram, with the top left hand corner of the bar to the right.

Step 2: Join with a straight line the top right hand corner with the right hand corner of the bar to the left.

Where the lines intersect is the modal value.

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10
Q

What is the median? How to calculate middle of odd items?

A

The value in the middle of a distribution once all the items have been arranged in order of magnitude.

The middle value of odd items can be calculated as: (N+1)/2
The middle value of even items can be calculated as the mean of the middle 2 numbers.

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11
Q

What is the range?

A

The difference between the highest observation and the lowest observation.

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12
Q

What are the most important measures of spread?

A

The variance ( o^2): The average of the squared mean deviation for each value.

The Standard Deviation (o): Measures the spread of data around the mean. The > the std deviation the more dispersed the data.

Standard Deviation = Square root of the variance.

Variance = (X - Mean)^2

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13
Q

How to calculate the variance & std dev of ungrouped data?

A

Variance = E(X - Mean^2) / N

Std Dev = Square root of variance.

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14
Q

How to calculate the variance & std dev of grouped data?

A

Variance = Sum of F ( X - Mean)^2 / Sum of F

Std Dev = Square root of variance

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15
Q

What is the coefficient of variation?

A

Compares the spread of 2 variables:

= Std Deviation / Mean

In general, the higher the coefficient of variation, the wider the spread of data.

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16
Q

What are the properties of a normal distribution?

A

The area under a curve in a probability distribution = 100% or 1.

It is symmetrical.

The mean is the mid way point. = 50%

17
Q

What are normal distribution tables and How to calculate Z score?

A

Normal distribution tables give the proportion of the total which is between the mean and a value, which is Z std deviations above the mean.

Z = X - Mean / Std Deviation

18
Q

What is the payback period?

A

The time taken for the cash inflows from an investment to equal the cash outflows.

19
Q

Advantages vs Disadvantages of payback period?

A

Advantages:
Simple, short term and quick to identify cash generators.

Disadvantages:

Ignores total project return, ignores time value of money.

20
Q

What is DCF?

A

Discounted cash flow analysis applies discounting arithmetic to costs and benefits of projects. Reducing value of future cash flows to present value equivalent.

21
Q

What are the conventions of DCF analysis?

A

Cash flows incurred at the beginning of the project occur in year 0.

Cash flows occurring during time period assumed to occur at period-end.

Cash flows occurring at beginning of period, assumed to occur at end of previous period.

22
Q

How to calculate PV of perpetuity?

A

1 / Cost of capital

23
Q

What is the NPV?

A

NPV is the value of all discounted future cash flows against initial investment cost.

If NPV > 0 = Accept
If NPV < 0 = Reject.

24
Q

What are the rules of investment appraisal?

A

Include:
Incremental cash flows.
Working capital requirements
Opportunity costs.

Exclude:

Depreciation
Dividends
Sunk Costs
Allocated costs/overheads

25
Q

What is IRR? vs NPV?

A

The rate of return at which NPV = 0

NPV is better than IRR as gives absolute values.

26
Q

How to calculate probably of at least one thing happening?

A

Probability of at least one thing happen. = 1-probably of nothing.

27
Q

How to calculate annuity with delayed cash flows?

A

Take the DF for years 1-N (N = last payment / receipt made)

Then deduct the DF for years prior to the start of the annuity.

28
Q

How to calculate a delayed perpetuity?

A

Step 1: Calculate PV of perpetuity ( 1/R * Cash flow)

Step 2: Discount cash flow to T0.

Eg if 1k 10% perpetuity starts in 4 years time.

1000 * 1/0.1 = 10k

10k * Discount factor for 3 years @ 10% = £7510

29
Q

What causes the P/V slope to decrease?

A

Reductions in the contribution per unit.

30
Q

If you’re not given direct cost usage (hrs/kg) can you use cost of limiting factor per unit instead in limiting factor?

A

Yes - eg if labour in short supply:

Calculate contribution per £ Labour and rank based on that.

CIMA: BA2 (5 decks)

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