BEC - Formulas 4

  1. Profitability Index
    • PV of net future cash inflow /
    • PV of net initial investment
  2. Payback Period
    • Net initial investment /
    • annual net after-tax cash flow
  3. Internal Rate of Return (IRR). Accept vs Reject levels are...
    • Net incremental investment / net annual cash flows
    • Accept when IRR > Hurdle rate; otherwise reject.
  4. Contribution Ratio
    Contribution Margin / Revenues
  5. Breakeven Point in Units
    Total fixed costs / Contribution Margin per unit = # units
  6. 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
  7. Breakeven Point in Units formula to ensure a certain amount of profit
    (fixed costs + pretax profit) / contribution margin per unit
  8. 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.
  9. 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.
  10. 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.
  11. Margin of Safety Percentage
    Margin of safety (dollars) / total sales
  12. 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