Section D: Decision making

Question 1

How to calculate breakeven point?

Answer 1

Fixed Costs / Unit contribution

Question 2

How to calculate C/S or P/V ratio?

Answer 2

Contribution / Sales

Question 3

How to calculate sales revenue at breakeven point?

Answer 3

Fixed costs / CS Ratio

Question 4

How to calculate Margin of safety?

Answer 4

Budgeted sales units - breakeven sales units.

or

Budgeted sales - Breakeven sales / Budget sales

Question 5

How to calculate sales volume to achieve target profit?

Answer 5

Fixed costs + Target profit / Contribution per unit

Question 6

How to perform limiting factor analysis?

Answer 6

Step 1: Identify what is the limiting factor (Materials, Labour etc)

Step 2: Calculate Contribution earned by each product.

Step 3: Calculate contribution per unit of limiting factor (Cont per unit / labour hrs per unit)

Step 4: Rank the products

Step 5: Determine the optimal production plan

Question 7

How to perform make or buy analysis?

Answer 7

Step 1: Identify limiting factor

Step 2: Compare relevant cost of producing vs cost of purchasing

Step 3: Calculate increase in cost by purchasing.

Step 4: Calculate additional cost of purchasing per unit of scare resource.

Step 5: Rank products based on what is the most expensive to purchase and target production to that product.

Step 6: Determine optimal production/purchase plan.

Question 8

How to calculate means?

Answer 8

Grouped: Sum of X / Number of items

Ungrouped: Sum of X x Frequency / Number of items or Sum of X x Frequency / Sum of Frequency.

Question 9

What is the mode? How to identify in grouped data?

Answer 9

Modal value is the most frequently occurring item.

In grouped data, the mode can be estimated from a histogram.

Step 1: Join with a straight line the top left hand corner of the highest bar in the histogram, with the top left hand corner of the bar to the right.

Step 2: Join with a straight line the top right hand corner with the right hand corner of the bar to the left.

Where the lines intersect is the modal value.

Question 10

What is the median? How to calculate middle of odd items?

Answer 10

The value in the middle of a distribution once all the items have been arranged in order of magnitude.

The middle value of odd items can be calculated as: (N+1)/2
The middle value of even items can be calculated as the mean of the middle 2 numbers.

Question 11

What is the range?

Answer 11

The difference between the highest observation and the lowest observation.

Question 12

What are the most important measures of spread?

Answer 12

The variance ( o^2): The average of the squared mean deviation for each value.

The Standard Deviation (o): Measures the spread of data around the mean. The > the std deviation the more dispersed the data.

Standard Deviation = Square root of the variance.

Variance = (X - Mean)^2

Question 13

How to calculate the variance & std dev of ungrouped data?

Answer 13

Variance = E(X - Mean^2) / N

Std Dev = Square root of variance.

Question 14

How to calculate the variance & std dev of grouped data?

Answer 14

Variance = Sum of F ( X - Mean)^2 / Sum of F

Std Dev = Square root of variance

Question 15

What is the coefficient of variation?

Answer 15

Compares the spread of 2 variables:

= Std Deviation / Mean

In general, the higher the coefficient of variation, the wider the spread of data.

Question 16

What are the properties of a normal distribution?

Answer 16

The area under a curve in a probability distribution = 100% or 1.

It is symmetrical.

The mean is the mid way point. = 50%

Question 17

What are normal distribution tables and How to calculate Z score?

Answer 17

Normal distribution tables give the proportion of the total which is between the mean and a value, which is Z std deviations above the mean.

Z = X - Mean / Std Deviation

Question 18

What is the payback period?

Answer 18

The time taken for the cash inflows from an investment to equal the cash outflows.

Question 19

Advantages vs Disadvantages of payback period?

Answer 19

Advantages:
Simple, short term and quick to identify cash generators.

Disadvantages:

Ignores total project return, ignores time value of money.

Question 20

What is DCF?

Answer 20

Discounted cash flow analysis applies discounting arithmetic to costs and benefits of projects. Reducing value of future cash flows to present value equivalent.

Question 21

What are the conventions of DCF analysis?

Answer 21

Cash flows incurred at the beginning of the project occur in year 0.

Cash flows occurring during time period assumed to occur at period-end.

Cash flows occurring at beginning of period, assumed to occur at end of previous period.

Question 22

How to calculate PV of perpetuity?

Answer 22

1 / Cost of capital

Question 23

What is the NPV?

Answer 23

NPV is the value of all discounted future cash flows against initial investment cost.

If NPV > 0 = Accept
If NPV < 0 = Reject.

Question 24

What are the rules of investment appraisal?

Answer 24

Include:
Incremental cash flows.
Working capital requirements
Opportunity costs.

Exclude:

Depreciation
Dividends
Sunk Costs
Allocated costs/overheads

Question 25

What is IRR? vs NPV?

Answer 25

The rate of return at which NPV = 0

NPV is better than IRR as gives absolute values.

Question 26

How to calculate probably of at least one thing happening?

Answer 26

Probability of at least one thing happen. = 1-probably of nothing.

Question 27

How to calculate annuity with delayed cash flows?

Answer 27

Take the DF for years 1-N (N = last payment / receipt made)

Then deduct the DF for years prior to the start of the annuity.

Question 28

How to calculate a delayed perpetuity?

Answer 28

Step 1: Calculate PV of perpetuity ( 1/R * Cash flow)

Step 2: Discount cash flow to T0.

Eg if 1k 10% perpetuity starts in 4 years time.

1000 * 1/0.1 = 10k

10k * Discount factor for 3 years @ 10% = £7510

Question 29

What causes the P/V slope to decrease?

Answer 29

Reductions in the contribution per unit.

Question 30

If you’re not given direct cost usage (hrs/kg) can you use cost of limiting factor per unit instead in limiting factor?

Answer 30

Yes - eg if labour in short supply:

Calculate contribution per £ Labour and rank based on that.