Formulas

Question 1

Chapter 1:
How do you calculate Direct Product Profit?

Answer 1

Selling price - bought in price - direct product costs.

Examples of direct product costs: Transport, Warehouse, Store

Question 2

Chapter 2:
How do you calculate throughput?

Answer 2

Sales revenue - Direct material cost

Question 3

Chapter 2:
How do you calculate throughput accounting ratio?

Answer 3

Return per hour = throughput per unit/product time on bottleneck

Cost per hour = total factory costs/total time on bottleneck

Throughput accounting ratio = return per hour/cost per hour

Question 4

Chapter 3:
How do you calculate total cost gap?

Answer 4

Estimated product cost - target cost

Question 5

Chapter 4:
How do you calculate the relevant cash flow during decision making?

Answer 5

Cash position if accepted - cash position if rejected

Question 6

Chapter 5:
How do you calculate compound interest?

Answer 6

V = X(1+r)^n

V = future value
X = Initial investment
r = interest rate
n = number of time periods

Question 7

Chapter 5:
How do you calculate the present value?

Answer 7

Future value x Discount Factor

Question 8

Chapter 5:
How do you calculate discount factor?

Answer 8

1/(1+r)^n

r = interest rate
n = number of time periods

Question 9

Chapter 5:
How do you calculate the internal rate of return?

Answer 9

L% + NPVl/(NPVl-NPVh) x (H% - L%)

L% = Lower discount rate
H% = Higher discount rate
NPVl = NPV at lower discount rate
NPVh = NPV at higher discount rate

Question 10

Chapter 5:
How do you calculate the Modified Internal rate of return (MIRR)?

Answer 10

(Terminal value of inflows/present value of outflow)^1/n - 1

Question 11

Chapter 5:
How do you calculate the present value on an annuity?

Answer 11

PV = Annual cash flow x AF

AF = (1 - (1+r)^-n)/r

r = cost of capital
n = number of periods

Question 12

Chapter 5:
How do you calculate present value of a perpetuity?

Answer 12

PV = annual cash flow/r
OR
PV = annual cash flow x 1/r

Question 13

Chapter 5:
How do you calculate the profitability index?

Answer 13

NPV/Initial Investment
OR
Present value of net cash inflows/initial investment

Question 14

Chapter 5:
How do you calculate the discounted payback probability index (DPBI)?

Answer 14

Present value of net cash inflows/initial cash outlay

Question 15

Chapter 6:
How do you calculate the accounting rate of return?

Answer 15

Average annual profit/average value of investment

Average value of investment = (initial investment + residual value)/2

Question 16

Chapter 6:
How do you calculate the impact of inflation on cash flows?

Answer 16

(1+m) = (1+r)(1+i)

r = real rate of return
i = inflation rate
m = money cost of capital

Question 17

Chapter 6:
How do you calculate equivalent annual cost when considering the replacement of an asset?

Answer 17

PV of costs/annuity factor for year n

Question 18

Chapter 7:
How do you calculate the price elasticity of demand?

Answer 18

Change in quantity demanded, as a % of demand/Change in price, as a % of price

Question 19

Chapter 7:
What is the marginal revenue equation?

Answer 19

MR = a - 2bQ

P = Price
Q = quantity demanded
b = slope of curve calculated, change in price/change in quantity
a = maximum price

Question 20

Chapter 7:
How do you calculate the gradient (b)?

Answer 20

Change in price / change in quantity

Question 21

Chapter 7:
After finding the gradient how do you find a?

Answer 21

P = a - bQ

P = price
b = gradient
Q = quantity demanded

Question 22

Chapter 7:
After finding ‘a’ how do you calculate the maximising quantity ‘Q’?

Answer 22

MC = a - 2bQ

MC = Variable cost
b = gradient

Question 23

Chapter 7:
How do you find the optimum price for profit maximisation?

Answer 23

P = a - bQ

Question 24

Chapter 8:
How do you calculate ROCE?

Answer 24

Operating profit/capital employed

Question 25

Chapter 8:
How do you calculate operating profit margin?

Answer 25

Operating profit/turnover

Question 26

Chapter 8:
How do you calculate the asset turnover?

Answer 26

Turnover/capital employed

Question 27

Chapter 8:
How do you calculate the current ratio?

Answer 27

Current assets/current liabilities

Question 28

Chapter 8:
How do you calculate the acid test (quick ratio)

Answer 28

(Current assets - inventories)/current liabilities

Question 29

Chapter 8:
How do you calculate return on investment?

Answer 29

Controllable operating profit/controllable capital employed x 100

Question 30

Chapter 8:
How do you calculate residual income?

Answer 30

Controllable profit - notional interest on capital

Question 31

Chapter 10:
How do you calculate the optimum transfer price as general rule?

Answer 31

marginal cost of selling division + opportunity cost of selling division

Question 32

Chapter 10:
How do you calculate the optimum transfer price in a perfectly competitive market for an intermediate product?

Answer 32

Market price - any small adjustment

Question 33

Chapter 10:
How do you calculate the optimum transfer price if the selling division has surplus capacity?

Answer 33

Marginal cost of the selling division

Question 34

Chapter 10:
How do you calculate the optimum transfer price if the selling division does not have surplus capacity?

Answer 34

marginal cost of the selling division + lost contribution

Question 35

Chapter 11:
How do you calculate sensitivity margin?

Answer 35

NPV/PV of flow under consideration

Question 36

Chapter 11:
How do you calculate the expected value?

Answer 36

EV = Epx

x = future outcome
p = probability of outcome occuring