Cost Volume Profit Analysis
This is the point at which all fixed cost is covered for by the contribution margin.
What is opportunity cost?
Costs that do not change between alternatives
What are irrelevant costs?
Length of time it takes to recover, in net cash inflows, the cost of capital outlay
What is the payback period?
Consideration that value of money in the future is not the same as the value of money in the present
This is the equation to find the breakeven point.
What is fixed cost / contribution margin per unit?
Cost of an opportunity foregone
What is an opportunity cost?
If a company expects to retrieve net cash inflows of $10,000 per year for 7 years when they made an investment of $40,000, the pay back period is...
What is 4 years?
Type of interest that is earned on principal amount plus all interests earned to date
What is compound interest?
This is the difference between current sales and the break-even sales. Essentially measures the amount of safety a business has.
What is the margin of safety?
Costs that have occurred in the past and are not relevant to decision making
What are sunk costs?
These are the four capital budgeting analysis techniques
What are accounting rate of return, payback period, net present value, and internal rate of return?
This is the amount of gain/loss a company incurs when the difference between the initial investment and the present value of the net cash inflows are taken.
What is net present value?
This ratio that is found by dividing the contribution margin by the operating income is the measure of "risk" that a business has. High number = high risk, high reward. Low number = low risk, low reward.
What is the operating leverage?
Tim can buy a one-month lease to a factory for $10,000 to produce baggy jeans. Tim is dealing with what kind of cost?
What is a relevant/opportunity cost?
This is the measure of profitability
Accounting rate of return
This is the equation for the accounting rate of return
(average net cash inflow - annual depreciation) / initial investment
What is the breakeven point for a company that has $5,000 of fixed costs, sells their products for $8, and incurs total variable costs of $3?
What is 1,000 units?
This term refers to whether a production factory is able to produce more units without incurring additional costs. It is important to keep this number in mind when deciding whether to potentially produce more units for a special customer to make additional revenue.
What is maximum capacity?
This is the equation for the present value of an investment
What is present value = future value * present value factor
These are the steps to find the internal rate of return
What is
1) Finding the PVF where initial investment is equal to present value of net cash inflows
2) Finding the interest rate using the PVF table