Business Finance Concepts

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Questions and Answers

What formula is used to calculate marginal costs in goods?

Old price x old quantity – New price x new quantity.

How do you calculate the contribution margin per unit?

Unit Selling price - Variable Cost.

What is the formula for the break-even point in sales volume?

Fixed Costs / Contribution Margin per unit.

How can you find the break-even point in peso sales?

Fixed Costs / Contribution Margin Percentage. Signup and view all the answers

What does the Rule of 72 help an investor determine?

It estimates how long it will take to double an investment. Signup and view all the answers

What is the first step in calculating the present value for each year of a proposal?

Pay out amount stated in the proposal / discount rate^year. Signup and view all the answers

What do you do if one of the years of a proposal does not pay out any money?

Its present value will be zero. Signup and view all the answers

How do you calculate the total present value of a proposal?

Add each present value of each year together. Signup and view all the answers

How do you calculate the Net Present Value (NPV)?

NPV is calculated by subtracting the Cash Outflow from the Total Present Value. Signup and view all the answers

What formula is used to determine the Cost Indifference Unit between two production sites?

The formula is FC1 + VC1(Q) = FC2 + VC2(Q). Signup and view all the answers

What do you need to do to solve for the Cost Indifference Amount?

You need to first solve for the Cost Indifference Unit. Signup and view all the answers

In the equation VC1(Q) - VC2(Q) = FC2 - FC1, what do you solve for?

You solve for the difference in variable costs adjusted by the fixed costs. Signup and view all the answers

What does a Cost Indifference Unit represent in production cost analysis?

It represents the quantity at which total costs are equal for two production sites. Signup and view all the answers

If a given unit exceeds the Cost Indifference Unit, which factory should be chosen?

Choose the factory with the lesser variable costs. Signup and view all the answers

How does one determine which production site has lower costs for a specified quantity?

By substituting the specified quantity into the Cost Indifference Unit formula and comparing the total costs. Signup and view all the answers

What is the consequence of choosing a factory when the unit is lower than the CIU?

You should choose the factory with the lesser fixed costs. Signup and view all the answers

Study Notes

Marginal Costs

The marginal cost of goods is calculated by subtracting the new price multiplied by the new quantity from the old price multiplied by the old quantity.
The marginal cost of wages is calculated by subtracting the new wage multiplied by the new number of workers from the old wage multiplied by the old number of workers.

Rule of 72

The rule of 72 is used to determine the approximate number of years it takes for an investment to double in value.
To calculate the doubling time, divide 72 by the annual interest rate.
This rule only applies when the investor wants to double their investment.

Contribution Margins

The contribution margin per unit is calculated by subtracting the variable cost from the unit selling price.
The contribution margin percentage is calculated by dividing the contribution margin per unit by the unit selling price.

Break-even Point

The break-even point is the point at which total revenue equals total expenses, resulting in zero profit or loss.
The break-even point in sales volume or quantity is calculated by dividing fixed costs by the contribution margin per unit.
The break-even point in peso sales or amount is calculated by dividing fixed costs by the contribution margin percentage.

Computing BEP with Desired Profit Given

The break-even sales volume or quantity is calculated by dividing the sum of fixed costs and desired profit by the contribution margin per unit.
The break-even peso sales or amount is calculated by dividing the sum of fixed costs and desired profit by the contribution margin percentage.

Present Value

The present value is the current value of a future cash flow.
The present value is calculated by discounting future cash flows to their present value using a discount rate.
To calculate the present value for each year, divide the payout amount stated in the proposal by the discount rate raised to the power of the year.
The total present value is calculated by adding the present value of each year.

Net Present Value

The net present value (NPV) is the difference between the present value of future cash flows and the initial investment.
The NPV is calculated by subtracting the cash outflow from the total present value.

Cost Indifference Unit

The cost indifference unit is the level of activity at which the total cost of two production sites are equal.
To calculate the cost indifference unit, set the total cost equation of one production site equal to the total cost equation of the other production site and solve for the quantity (Q).

Cost Indifference Amount

The cost indifference amount is the total cost at the cost indifference unit.
To calculate the cost indifference amount, substitute the cost indifference unit into either of the total cost equations.

Choosing Between Production Sites

If the given unit of the problem exceeds the cost indifference unit, choose the factory with the lesser variable costs.
If the given unit of the problem does not exceed the cost indifference unit, choose the factory with the lesser fixed costs.

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Description

Test your knowledge on key business finance concepts including marginal costs, the rule of 72, contribution margins, and break-even points. This quiz will help you understand essential financial calculations that are crucial for making informed business decisions.