ACGT 211 Exam II

how to solve bond problem:

use two step method to determine price, discount or premium, J/E to buy, sell, pay and receive interest (assuming straight-line amortization)

CAGR (acronym)

compound annual growth rate

how to calculate CAGR?

calculate “i”

rule of 72

to estimate roughly how long it will take for an investment to double in value, divide the interest rate as a number by 72

cost behavior

how costs react to changes in the level of activity

variable costs

costs vary with the cost object

fixed costs

costs that do not vary with the cost object

cost object

the object which costs are gathered

how variable cost behaves when production goes down or up?

unit: no change; total: down or up

how fixed cost behaves when production goes down or up?

unit: down or up; total: no change

the three golden rules for cost allocation

just because you can does not mean you should; when in doubt do not allocate; “what difference does it make?” (in behavior)

relevant costs aka differential costs aka incremental costs

costs that differ between two alternatives

sunk cost

cash already spent; irrelevant to decision making

opportunity cost

the cost of the road not taken

traceable fixed costs

fixed costs that can be traced to a particular product or business segment (think “direct fixed costs”)

common fixed costs

fixed costs that cannot be directly traced to a particular product or business segment and are common to all (think “indirect fixed costs”)

contribution margin

revenue minus variable costs; contributes towards covering fixed costs

segment margin

contribution margin minus traceable fixed costs; contributes towards covering common fixed costs

transfer pricing

price established between related parties

short term pricing

covers variable costs and contributes to covering fixed costs (aka variable pricing, contribution margin)

long term pricing

covers all costs (fixed and variable)

Why is long term and short term pricing important?

companies must price for the long term to cover all expenses and ROI but can take advantage of specific opportunities in the short term with short term pricing

unit contribution margin

revenue minus variable costs divided by # of units

contribution margin

revenue minus VC

contribution margin ratio

revenue minus VC divided by revenue

breakeven point (sales dollars)

FC divided by CMR

breakeven point (sales units)

FC divided by UCM

margin of safety (sales dollars)

sales minus breakeven sales dollars

margin of safety (units)

units minus breakeven units

weighted-average contribution margin

sales mix percentage times contribution margin ratio plus additional pools

weighted-average contribution margin ratio

sales mix percentage times contribution margin ratio plus additional pools