PM Rote > E Formulas > Flashcards

E Formulas Flashcards

(65 cards)

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1
Q

Return on equity?

A

(Profit before (or after) tax / Equity) * 100

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2
Q

Return on capital employed?

A

(Operating profit / Capital Employed) * 100

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3
Q

Capital employed

A

Total assets less current liabilities = total equity plus long-term debt

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4
Q

Gross profit margin?

A

(Gross profit / Revenue) * 100

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5
Q

Operating profit margin?

A

(Operating profit / Revenue) * 100

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6
Q

Asset turnover ratio?

A

(Revenue / Capital Employed)

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7
Q

ROCE combined formula?

A

Operating profit margin * Asset turnover

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8
Q

Current ratio?

A

Current assets at period end / current liabilities at period end

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9
Q

Inventory holding period?

A

(Average inventory / Cost of sales) * 365

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10
Q

Receivables collection period (days)?

A

(Average receivables / Credit sales) * 365

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11
Q

Payables payment period (days)?

A

(Average payables / Credit purchases) * 365

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12
Q

Quick ratio?

A

(Current assets at period end - Inventory at period end) / Current liabilities at period end

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13
Q

Gearing as a percentage

A

(Debt / total equity) * 100

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14
Q

Gearing

A

(Debt / Debt+Total Equity) * 100

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15
Q

Interest coverage

A

Operating profit / Interest

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16
Q

ROI for manager?

A

(Controllable profit / Capital employed) * 100

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17
Q

ROI for division?

A

(Traceabke profit / capital employed) * 100

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18
Q

Imputed interest?

A

Capital employed × Interest rate

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19
Q

Opportunity cost if selling divison sells to external customers?

A

The contribution per unit from external sales

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20
Q

When may a market price method be used? (transfer pricing)

A

If buying and selling divisions can buy/sell externally at market price

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21
Q

When is full cost plus method used? (transfer pricing)

A

Supplying division charges full absorption cost plus a mark-up

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22
Q

Marginal cost (transfer pricing)

A

Variable cost + Any incremental fixed costs

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23
Q

Opportunity cost apporach (transfer pricing)?

A

Marginal cost of making desired product + contribution foregone for making non-desired product

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24
Q

When to use opportunity cost approach?

A

If division is operating at full capacity

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25
When will selling division likely consider opportunity cost when negotiating a transfer price?
An external market exists The division has no spare capacity
26
Maximum price buying divison is prepared to pay selling division?
LOWER OF: Market price Contribution excluding cost of the component: (Selling price - variable costs)
27
Issue if a cost plus price is used?
The selling division has no incentive to reduce its costs
28
When may a transfer price below market price be appropriate?
When internal sales incur lower costs than external sales
29
Minimum transfer price if selling division is not working at full capacity and can meet external market demand
Marginal cost of production in selling division
30
Maximum transfer price if selling division is not working at full capacity and can meet external market demand
External market price
31
WHat is the opportunity cost when a perfect external market price exists and unit variable costs and unit selling prices are constant?
External market price OR External market price - savings in selling costs
32
What is the minimum transfer price if selling division has spare capacity?
Variable cost + opportunity cost
33
What is the minimum transfer price if selling division doesn't have spare capacity?
Variable cost + opportunity cost (contribution foregone for making non-desired product)
34
Why use market price (transfer pricing)
Encourages selling and buying decisions which appear to be in the best itnerests of the division's performance
35
What is meant by full cost plus 40%
(Variable costs + fixed costs) * 40%
36
Minimum transfer price for selling division?
Transfer price ≥ Marginal cost of selling division
37
Maximum transfer price for buying division?
Transfer price ≤ LOWER OF external market price OR net revenue of buying division
38
When is opportunity cost zero? (Selling division)
No external market External market but spare capacity No production constraints
39
When does an opportunity cost arise? (Selling division)
An external market exists Supplying division operates at full capcity
40
Minimum transfer price for selling division (oppounrtiy cost)
Marginal cost of selling division + contribution foregone of buying division
41
In maximum transfer price, why is it lower of external market price and net revenue of buying division
Buying division is not disadvantaged by receiving a price higher than the market rate, while still allowing for internal efficiency
42
In transfer pricing, is another division's revenue another division's cost?
Yes
43
What should be done to sales in transfer pricing?
Split internally and externally
44
If buying division can now buy adaptors from outside the group for £13. What is the optimum position of selling position
Sell as many adaptors as possible to external customers at £15, then sell remainder to buying division and agreed price between them
45
When should selling division sell externally before selling internally?
When contribution per unit of selling division > incremental cost of buying division
46
What does buying division generate every time they sell a motor externally?
Selling price per unit - variable cost per unit (The contribution)
47
What does the selling division generate whenever they buy something from outside of the group?
(Incremental cost) price from supplier - variable cost from selling division
48
What is contribution lost on external sales per unit if selling division has spare capacity?
Selling price per unit for selling division - variable cost per unit for buying division
49
What price would the selling division be willing to sell for?
Anything above their marginal cost
50
What is meant by no spare capacity in transfer pricing?
Internal sales come at the cost of foregoing external sales. Selling division demands a higher price for internal transfers to compensate for lost external revenue
51
Calculate unsatisfied external demand?
(External sales / demand) - external sales
52
What will the selling division ideally want the transfer price to be?
At least the marginal cost of their product, but will always want it higher. As high as possible
53
What will the buying division ideally want the transfer price to be?
As low as possible
54
If 35000 units are required for buying division but selling division can only supply 30000. What should be done?
5000 should be brought from the alternative supplier if priority is to trade in group
55
From the group perspective, when does it make sense for as many external sales should be made before selling internally?
When selling division profit is higher than incremental cost of buying division
56
When question says maximise group profits?
Think of contribution of selling division and incremental cost of buying division. If contribution per unit is higher, then sell as many outside the group first. If incremental cost higher, sell as many inside group first
57
Assume Division M has spare capacity to produce 28,000 motors. Head office has now introduced a new policy stating that Division M must sell 35,000 motors per year to Division S What is done here?
28000 is spare capacity (marginal cost) 7000 is not spare capacity (marginal cost + lost contribution)
58
When the capacity is 60000 but the external demand is 35000 for a selling divisiob?
25000 spare capacity (marginal cost) (would be willing to sell if transfer price > marginal cost) 35000 no spare capacity (marginal cost + lost contribution) (would be willing to sell if transfer price > marginal cost + lost contribution)
59
How to calculate incremental cost from buying division?
Cost from supplying division - cost from supplying in house
60
ROI?
Operating profit / Net assets
61
RI?
Operating profit - (Net assets * cost of capital)
62
Get operating profit from residual income?
Residual income + imputed interest
63
What capital employed does imputed interest use?
The capital employed after project figure, not before project
64
Is depreciation relevant to start of year or end of year?
End of year
65
Calculate capital employed?
Equity + long-term liabilities
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