Section D: Decision making Flashcards
How to calculate breakeven point?
Fixed Costs / Unit contribution
How to calculate C/S or P/V ratio?
Contribution / Sales
How to calculate sales revenue at breakeven point?
Fixed costs / CS Ratio
How to calculate Margin of safety?
Budgeted sales units - breakeven sales units.
or
Budgeted sales - Breakeven sales / Budget sales
How to calculate sales volume to achieve target profit?
Fixed costs + Target profit / Contribution per unit
How to perform limiting factor analysis?
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
How to perform make or buy analysis?
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.
How to calculate means?
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.
What is the mode? How to identify in grouped data?
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.
What is the median? How to calculate middle of odd items?
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.
What is the range?
The difference between the highest observation and the lowest observation.
What are the most important measures of spread?
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
How to calculate the variance & std dev of ungrouped data?
Variance = E(X - Mean^2) / N
Std Dev = Square root of variance.
How to calculate the variance & std dev of grouped data?
Variance = Sum of F ( X - Mean)^2 / Sum of F
Std Dev = Square root of variance
What is the coefficient of variation?
Compares the spread of 2 variables:
= Std Deviation / Mean
In general, the higher the coefficient of variation, the wider the spread of data.
What are the properties of a normal distribution?
The area under a curve in a probability distribution = 100% or 1.
It is symmetrical.
The mean is the mid way point. = 50%
What are normal distribution tables and How to calculate Z score?
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
What is the payback period?
The time taken for the cash inflows from an investment to equal the cash outflows.
Advantages vs Disadvantages of payback period?
Advantages:
Simple, short term and quick to identify cash generators.
Disadvantages:
Ignores total project return, ignores time value of money.
What is DCF?
Discounted cash flow analysis applies discounting arithmetic to costs and benefits of projects. Reducing value of future cash flows to present value equivalent.
What are the conventions of DCF analysis?
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.
How to calculate PV of perpetuity?
1 / Cost of capital
What is the NPV?
NPV is the value of all discounted future cash flows against initial investment cost.
If NPV > 0 = Accept
If NPV < 0 = Reject.
What are the rules of investment appraisal?
Include:
Incremental cash flows.
Working capital requirements
Opportunity costs.
Exclude:
Depreciation
Dividends
Sunk Costs
Allocated costs/overheads
