accounting exam 3

What is the formula for ROI (Return on Investment)?

ROI = NOI / Avg Operating Assets or Margin (NOI/Sales) × Turnover (Sales/Avg Assets)

How is Residual Income calculated?

Residual Income = NOI - (Avg Assets × Min Required Return)

What is the formula for EVA (Economic Value Added)?

EVA = NOPAT - (Invested Capital × WACC)

What type of assets are considered irrelevant in performance analytics?

Irrelevant assets include land held for future expansion and stock investments in other firms.

What should be compared when considering whether to keep or drop a product?

Compare Avoidable Fixed Costs versus Lost Contribution Margin, ignoring all allocated costs.

What are the relevant costs in a Make or Buy decision?

Relevant Make costs include Variable Costs + Avoidable Fixed Costs + Opportunity Costs.

What is the minimum price for a special order when there is idle capacity?

Min Price = Variable Costs + Out-of-pocket setup costs.

What is the minimum price for a special order when there is no idle capacity?

Min Price = Variable Costs + Opportunity Cost (Normal Contribution Margin lost).

How is the constraint strategy determined?

Rank and produce by Contribution Margin divided by Constraint Unit.

What is the Max Resource Price formula?

Max Resource Price = Normal Cost + Constraint Contribution Margin.

When should a joint split-off process be considered?

Process if Incremental Revenue > Further Processing Costs; joint costs are considered sunk.

How is the Payback Period calculated?

Payback Period = Initial Net Investment ÷ Annual Net Cash Inflow (no discounting or depreciation).

What does SRR indicate and how is it calculated?

SRR (Simple Rate of Return) = Annual Incremental NOI ÷ Initial Investment; note that NOI = Cash Inflow - Depreciation.

What is the formula for NPV (Net Present Value)?

NPV = PV(Inflows) - Initial Outlay; accept if NPV is >= 0.

What is the Profitability Index (PI) and its acceptance condition?

PI = PV(Inflows) ÷ Initial Outlay; accept if PI is >= 1.0.

How is the IRR (Internal Rate of Return) lookup factor calculated?

IRR Lookup Factor = Initial Investment ÷ Annual Cash Inflows; match with row 'n' on the PVIFA table.