Flashcards in BEC Deck #6 Deck (20)

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1

##
How does a firm maximize profits in a perfectly competitive industry?

How do you calculate economic profit?

###
MR must equal MC. MR is Price in a perfectly competitive industry.

Economic profit = TR-TC. TR=Price x units TC=Avg total cost x output

2

## How do you calculate cost to allocate for normal & abnormal spoilage (ultimately, the debit to FG)?

###
Cost of normal spoilage should be absorbed by saleable units & included in finished goods while cost of abnormal spoilage is recognized in period. To calculate:

Total units produced, e.g.5000+200+300=5500

Good + normal spoiled = 5000+200=5200

allocate cost to good units = (5200/5500)*99000=93,600

allocate cost to abnormal = (300/5500)*99000=5400

3

## What standard cost variance is least controllable by a production supervisor?

###
Overhead volume. 3 factors related to volume OH:

1.) OH volume variance is related to fixed OH. No volume variance for variable OH.

2.) Fixed OH is a function of estimated volume.

3.) OH volume variance occurs when actual production volume differs from estimated volume.

4

## If a company acquires a new production machine, how do you calculate the discounted net of tax contribution margin?

### Calculate margin - sales revenue less variable costs. Reduce for taxes. Apply the after tax CM to PV of an ord annuity for # of periods. Arrive at discounted net-of-tax contribution margin for the project.

5

## What's a key rationale/cause for the changing pattern of investment in agriculture by sovereign wealth funds?

### To ensure food security in the event that crop shortages would result in an export ban, curtailing the ability to import crops.

6

## What's the current pattern of FDI?

### Used to be slower growing developed nations investing in emerging markets. Now there's been a shift and emerging markets are investing in developed economies. Lack of well functioning capital markets/local investment opps created funds to invest in technologies, brands, resources, better access to international markets, and use of technology to enhance productivity and gain western management skills.

7

## How do you calculate absorption costs?

### Mfg fixed costs are treated as product costs & assigned to units. Fixed costs follow units through WIP and FGs as inventoriable costs & are expensed through COGS when units are sold. Divide mfg fixed costs/# of units to get per unit FC. Add other variable & material/unit costs to get total per unit costs. Multiply total by # of units and subtract from sales. Subtract selling & admin.

8

## How do you use the Gordon Growth Model to calculate the cost of capital?

### Capital cost = Next dividend/Mkt price (1-Flotation cost) + dividend growth rate

9

## What's an example of a compliance objective per COSO?

### Maintaining safe levels of carbon dioxide emissions during production to protect workers (per OSHA). (Refers to operating effectiveness/efficiency & financial statement reliability objectives).

10

## How do you calculate breakeven point if given data for 2 products?

### Total fixed costs need to be covered by the 2 products so add them together, e.g. 100K (prod 1) + 212K (prod 2). If prod 1 is 75% of sales and prod 2 is 25%, we know prod 1 is 3 times as many sales. Imagine products are sold in one package: 3x$10(SP prod 1)+$25(SP prod 2)=$55. Then VC: 3x$6(VC prod 1)+$13=$31. CM=55-31=$24. Breakeven units = FC/CM per unit. $312K/$24=13K units. 3 units of prod 1 in each package, so 3x13K=39K.

11

## What's one of the effects of rapid technological change on nations in the global economy?

### Global labor arbitrage: Removing/reducing barriers to intl trade, causing jobs to move to nations where labor costs & cost of doing biz (due to factors like labor laws & environmental regs) is lower.

12

## What's most helpful for estimating the price at which goods might be sold in future years?

### Current CPI. It's more stable than the PPI.

13

## Formulas for profitability index, IRR, NPV, PV of $1, EVA, and payback

###
NPV:

1.) Calc after tax cash flows = Ann net cash flow x (1-Tax Rate)

2.) Add deprn benefit = Deprn x tax rate

3.) Multiply result by appr PV of annuity

4.) Subtract initial cash outflow

Reult: NPV

Profitability Index: Prof index = PV of net future cash flow/PV of net initial investment (cost)

IRR: Accept when IRR>hurdle rate +NPV PI>1

Reject when IRR<1

EVA: NOPAT - $WACC

Payback: Payback pd = net initial investment/incr in annual net after-tax cash flow

Present Value of $1

PV=FV/(1+r)^n

FV=future value, r=rate, n=# of years

14

## What are the formulas for ROI, RI, ROE, ROA, and Financial Leverage?

###
ROI = Income/Investment Capital or ROI = profit margin x investment turnover

RI = Net income (from IS) - required return

ROE = Net Income/Total Equity

ROA = Net income/Avg total assets

Financial Leverage = Avg total assets/equity

DuPont ROE: ROA x Financial Leverage

15

## How do you calculate an amount in real terms after inflation?

### Formula is Real$n=amount / (1+inflation rate)^n (n=# of pds)

16

##
How do you calc weighted annual interest rate for trade credit?

How much does it cost to hold money for extra days?

How do you get annual weighted interest rate?

###
E.g. 2% savings foregone divided by 98% (100-2). 2.041%

E.g. 30 day terms - 10 discount pd = 20. 360/20 = 18 20 day pds in yr. 1/3 of total purchase, e.g. 25/(25+50).

Formula: .02041x18x.3333=.12245

Add product 1 & product 2 contributions to get annual weighted interest rate.

17

## If a firm is concerned with receiving all funds invested in a timely manner, they are concerned with

### marketability and default risk.

18

## If USD quoted at 120 yen on spot and 123 on 90 day forward contract, annual effect in forward mkt is

### USD is at premium of 10%. Diff is 3 yen, over 360 day yr, diff of 3 yen translates to 12 yen (360/90=4*3=12), 10% of spot market quote of 120 yen.

19

##
APR of quick payment discount formula

Cash conversion cycle

Reorder point (inventory mgmt)

###
APR of quick payment discount: 360/pay pd-discount pd. x discount/(100-discount)%

Cash conversion cycle = inventory conversion pd + receivables collection pd - payables deferral pd

Reorder point = Safety stock + (lead time x sales during lead time in days/weeks)

20