Cost revision

Inventory turnover = cost of goods sold / average inventory balance

Average sale period = 365 days / Inventory turnover

Return on assets = Net income + (interest expense * (1 tax rate)) / average total assets

Working capital = current assets current liabilities

Current ratio = current assets / current liabilities

Acid test ratio = (current assets inventory) / current liabilities

Accounts receivable turnover = sales on account / average accounts receivable balance

Average collection period = 365 days / accounts receivable turnover

Fixed cost per unit = Fixed cost / no. of units Variable cost per unit = Variable costs / no. of units

Fixed cost ratio = fixed costs / sales Variable cost ratio = Variable costs / sales

CM = Sales Variable costs CMu = SP VCu Sales = SP Activity level

Breakeven points (units) = Fixed costs / CMu = Fixed costs / (SP VCu)

Breakeven points (revenue) = Fixed costs / CM ratio = Fixed costs / (CM / sales) = Fixed costs / (CMu / SP)

Quantity to achieve profit = (Fixed costs + target profit) / CMu = (Fixed costs + target profit) / (SP-VCu)

Revenue to achieve profit = (Fixed costs + target profit)/CM ratio = (Fixed costs + target profit)/[(SP-VCu)/SP]

ROI = Margin Turnover ROI = Net operating income / average total assets

ROI = (NI / Sales) (Sales / Average operating assets)

RI = N.I. Minimum required return

Income statement using contribution margin Traditional format of income statement

Sales Sales
-Variable costs - Cost of goods sold
= Contribution margin = Gross margin
- Fixed costs - selling and other expenses
= Net Income (Loss) = Net income (Loss)

Margin of safety (in dollars) = Target sales breakeven sales

Direct material+Direct labor+manufacturing overhead
Y = a + bx
Y = mixed costs +Work in process beginning
a = fixed cost -Work in process ending
b = variable cost per unit = Cost og goods manufactured
x = no. of units
+Finished goods beginning
b = (high cost low cost) / (high activity low activity)
-Finished goods ending
= Cost of goods sold

1
Prime costs = Direct materials + Direct labor
Conversion costs = Direct labor + Factory overhead

Cash flow statement

Net income xx
Cash flow from operating activities:-
+ Depreciation xx
- Increase in current assets (xx)
+ Increase in current liabilities xx
- Gain on sale of fixed assets (xx) xx

Cash flow from investing activities:-

- Increase in fixed assets (xx)
+ Decrease in fixed assets xx
- Long term investment in securities (xx) xx

Cash flow from financing activities:-

+ Issue shares xx
+ Issue bonds xx
+ Increase in long term liabilities xx xx
= Increase in cash xx
+ Cash at beginning xx
= cash ending balance xx
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In its budget for next month, Haney Company has revenues of $500,000, variable costs of $350,000, and fixed
.costs of $135,000

a. Compute contribution margin percentage.

b. Compute total revenues needed to break even.
c. Compute total revenues needed to achieve a target operating income of $45,000.
Solution
a. Contribution margin percentage = ($500,000 $350,000) $500,000 = $150,000 $500,000 = 30%
b. Breakeven point (in revenue) = $135,000 0.30 = $450,000

$135,000 $45,000 $180,000

c. Revenues needed to achieve target operating income $600,000
0.30 0.30
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A B C
SP 100 120 80
VCu 75 80 60
Sales mix 30% 40% 30%
Fixed cost L.E. 12,000
- Find the Breakeven point
- Find out sales value for each product
- Number of units of each product
Answer
A B C
3Q : 4Q : 3Q
Sales variable cost fixed cost = zero
(100-75) * 3Q + (120-80) * 4Q + (80-60) * 3 Q 12,000 = zero
75Q + 160Q + 60Q = 12,000

2
295Q = 12,000 Q = 41
A = 3Q = 3*41 = 123
B = 4Q = 4*41 = 164
C = 3Q = 3*41 = 123
Breakeven point = 123+164+123 = 410

Sales value for A = 123 * 100 = 12300

Sales value for B = 164 * 120 = 19680
Sales value for C = 123 * 80 = 9840
AB Co. had both variable cost per unit at 20 and total manufacture cost for 2003, 2004 remained
constant at 2,000,000. In 2003 the company produced 100,000 units and sold 80,000 units at a
price of 50 per unit.
There was no beginning inventory in 2003. In 2004 the company made 70,000 units and sold
90,000 units at a price of 50.
Selling administrative expenses were all fixed at 100,000 each year.
Required: Prepare income statement for each year using:-
a. Absorption Costing
b. Variable Costing

a- Income statement: (value in thousands)

2003 2004
Sales revenue (80,00050) (90,00050) 4,000 4,500
- COGS
Beginning inventory - 800
+ Manufactured during period:
Variable 2,000 1,400
Fixed 2,000 2,000
Total manufacturing cost 4,000 4,200
Ending inventory (100,000-80,000) - (800)
40
Cost of goods sold 3,200 4,200
Gross margin 800 300
Selling costs - (100) ((100
Operating income 700 200

Beginning inv. 2004 = (90,000 70,000) 40 = 800,000

Total cost per unit = Total cost / Units manufactured = 4,000,000 / 100,000 = 40
Ending inventory = Ending units 40

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 b- Income statement: (value in thousands)

2003 2004
Sales revenue (80,00050) (90,00050) 4,000 4,500
- Variable cost (80,00020) (90,00020) 1,600 1,800
= Contribution margin 2,400 2,700
- Fixed expenses
Manufacturing costs 2,000 2,000
Selling costs 100 100
2,100 2,100
Operating income = 300 600
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DM Price Variance = (AP SP) x Actual quantity purchased

DM Efficiency Variance = (Actual quantity used Standard quantity allowed) x SP

Direct-labor price variance = (Actual price Budgeted price) Actual quantity

Direct-labor efficiency variance = (Actual quantity Standard quantity) Standard price

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The companys required rate of return is 15%. Would the company want the manager of the Alaa
division to make an investment of $100,000 that would generate additional net operating income
of $18,000 per year?
a. Yes
b. No
ROI = $18,000/$100,000 = 18%. The return on the investment exceeds the minimum required
rate of return.
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Mohammed ashraf, a division of Manar Corp., has a net operating income of $60,000 and
average operating assets of $300,000. The required rate of return for the company is 15%. What
is the divisions residual income?
a. $240,000
b. $ 45,000
c. $ 15,000
d. $ 51,000
Net operating income $60,000
Required return (15% of $300,000) $45,000
Residual income $15,000
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4
Gavin and Alex, baseball consultants, are in need of a microcomputer network for their staff.
They have received three proposals, with related facts as follows:

Proposal A Proposal B Proposal C

Initial investment in $90,000 $90,000 $90,000
equipment
Annual cash increase in
operations:
Year 1 80,000 45,000 90,000
Year 2 10,000 45,000 0
Year 3 45,000 45,000 0
Salvage value 0 0 0
Estimated life 3 yrs 3 yrs 1 yr
The company uses straight-line depreciation for all capital assets.
Required:

a. Compute the payback period, net present value, and accrual accounting rate of return
with initial investment, for each proposal. Use a required rate of return of 14%.

a. Payback Method

Payback for Proposal A: Year 1 $80,000

Year 2 10,000
Payback is 2 years $90,000

Payback for Proposal B: Year 1 $45,000

Year 2 45,000
Payback is 2 years $90,000

Payback for proposal C: Year 1 $90,000

Payback is 1 year

Net Present Value:

Proposal A: PV of
Predicted PV Cash
Cash Flows Year(s) Factor Flows

Investment $(90,000) 0 1.000 $(90,000)

Annual operations:
Year 1 80,000 1 0.877 70,160
Year 2 10,000 2 0.769 7,690
Year 3 45,000 3 0.675 30,375
Net present $ 18,225
value

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 Proposal B: PV of
Predicted PV Cash
Cash Flows Year(s) Factor Flows

Investment $(90,000) 0 1.000 $(90,000)

Annual operations:
Year 1 45,000 1 0.877 39,465
Year 2 45,000 2 0.769 34,605
Year 3 45,000 3 0.675 30,375
Net present value $ 14,445

Proposal C: PV Of
Predicted PV Cash
Cash Flows Year(s) Factor Flows

Investment $(90,000) 0 1.000 $(90,000)

Annual operations:
Year 1 90,000 1 0.877 78,930
Net present $ 11,070
value

Accrual Accounting Rate of Return:

Proposal A: (80,000 + 10,000 + 45,000)/3 - (90,000/3) = 0.167

90,000

Proposal B: (45,000-30,000)/90,000 = 0.167

Proposal C: (90,000- 90,000)/90,000 = 0.0

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