FNSACC507A – Provide Management Accounting Information
COST‐VOLUME‐PROFIT ANALYSIS ‐ FORMULAE
1. Required selling price (i.e. sales price required to earn a predetermined profit)
The formula that you choose to use out of the following three (3) provided below will depend on the
information which you have been given to work with.
a. Total Sales – Total Variable Cost – Total Fixed Cost = Net Profit (before tax)
Re‐arrange this equation to give you:
Total Sales = Net profit (before tax) + Total Fixed Cost + Total Variable Cost
Therefore;
Sales per unit = Total Sales / No. units sold
OR
b. Total Sales – Total Variable Cost = Total Contribution Margin
Re‐arrange this equation to give you:
Total Sales = Total CM + Total VC
Therefore;
Sales per unit = Total Sales / No. units sold
c. Sales per unit = Contribution Margin per unit + Variable cost per unit
2. Break‐even sales (UNITS)
BEP (units) = Total Fixed Cost / Contribution Margin per unit
Contribution Margin per unit = Sales per unit – Variable Cost per unit
3. Break‐even sales ($)
BEP ($) = Total Fixed Cost / Contribution Margin Ratio
Contribution Margin ratio = Contribution Margin per unit / Sales per unit
Where; BEP = Break‐even point
4. Units sales required to earn target profit ($)
Target sales (units) = Total Fixed Cost + Target Net Profit (before tax) / CM per unit
Where; CM = Contribution Margin
5a. To include income taxes in the cost‐volume‐profit model you have to convert a before‐tax profit
into an after‐tax profit:
After‐tax profit = Before‐tax profit x (1 – Tax rate)
5b. To exclude income taxes from the cost‐volume‐profit model you have to convert an after‐tax
profit into a before‐tax profit (which will then enable you to use formula (4) above).
Before‐tax profit = After‐tax profit / (1 – Tax rate)
6. Margin of safety
= Projected or actual sales (units) ‐ Break‐even sales (units)
7. Margin of safety ratio (%)
= Margin of safety (units) / Projected or actual sales (units)
1
, Ratio Analysis
Liquidity Ratios
Current Ratio = (Current Assets/Current Liabilities)
Quick Ratio (Acid Test) = (Current Assets - Inventory)/Current Liabilities
Asset Management Ratios
Inventory Turnover* = (Cost of Goods Sold/Inventory)
Days Sales Outstanding = (Accounts Receivable)/(Sales/365))
Fixed Assets Turnover** = (Sales/Net Fixed Assets)
Total Assets Turnover = (Sales/Total Assets)
Debt Management Ratios
Total Debt to Total Assets = (Liabilities/Assets)
Times Interest Earned = (EBIT***/Interest)
Cash Coverage Ratio = (EBIT + Depreciation)/Interest
Profitability Ratios
Gross Profit Margin = (Sales – Cost of Goods Sold)/Sales
Operating Profit Margin = (Operating Income/Sales)
Net Profit Margin = (Net Income/Sales)
Return on Assets = (Net Income/Assets)
Return on Equity = (Net Income/Common Equity****)
Market Values
Price/Earnings Ratio = (Market Price/Earnings Per Share)
Market/Book Ratio = (Market Price/Book Value)
Dividend Yield = (Dividends per Share/Market Price)
---------------------------------------------------------------------------------------
*Some analysts calculate the Inventory Turnover Ratio as Sales//Inventory
**Net Fixed Assets typically refers to Net Property, Plant and Equipment. If Property,
Plant and Equipment is not specifically identified on the balance sheet, just use
long-term assets.
***EBIT stands for Earnings Before Interest and Taxes (sometimes referred to as
operating income).
****Common Equity is also referred to as Owner’s Equity or Stockholders Equity
Earnings per share = Net Income/Shares Outstanding
Book Value = Owner’s Equity/Shares Outstanding
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through EFT, credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying this summary from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller Examhub. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy this summary for R67,00. You're not tied to anything after your purchase.
