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BEC - Formulas 4
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Profitability Index
PV of net future cash inflow /
PV of net initial investment
Payback Period
Net initial investment /
annual net after-tax cash flow
Internal Rate of Return (IRR). Accept vs Reject levels are...
Net incremental investment / net annual cash flows
Accept when IRR > Hurdle rate; otherwise reject.
Contribution Ratio
Contribution Margin / Revenues
Breakeven Point in Units
Total fixed costs / Contribution Margin per unit = # units
Breakeven Point in Dollars
(1) Use the breakeven point in units x price per unit = Total Sales
(Total fixed costs / contribution margin per unit) x price per unit OR
(2) Total fixed costs / contribution margin
ratio
Breakeven Point in Units formula to ensure a certain amount of profit
(fixed costs + pretax profit) / contribution margin per unit
Both formulas for Breakeven Point in Dollars to ensure a certain amount of profit
Sales Dollars = (fixed costs + pretax profit) / Contribution margin ratio OR
Sales Dollars = total variable costs + fixed costs +
pretax
profit, where total variable costs = variable cost/unit x # units.
Set a selling price based on an assumed number of units sold
Sales price per unit = (fixed costs + total variable costs + pretax profit) / assumed number of units sold, where
total variable cost = VCost per unit x assumed number of units sold.
Margin of Safety
The excess of sales over breakeven sales (aka the pretax profit or net operating income)
Margin of safety (dollars) = total sales - breakeven dollars.
Margin of Safety Percentage
Margin of safety (dollars) / total sales
Target Costing
Target cost = market price - required profit
(Can use totals or per unit amounts)
Author
BethM
ID
331239
Card Set
BEC - Formulas 4
Description
Becker Review
Updated
2017-05-09T17:04:04Z
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