ACCT Exam 2- Cheat Sheet

special order formula

(Special price − Variable cost per unit) × Units − Extra costs

keep or drop a product formula

Avoidable fixed costs saved − Contribution margin lost

make or buy product formula

Relevant cost to make − Cost to buy

sell or process further formula

Additional revenue − Additional processing costs

Contribution margin per unit formula

Selling price − Variable cost per unit

constrained resource formula

Contribution margin per unit ÷ Resource used per unit

relevant

future costs or revenues that differ between choices.

irrelevant

items that do not change

sunk costs

always irrelevant

opportunity costs

benefits given up by choosing another option

Calculate the fixed costs actually saved, and the contribution margin lost.

• If savings exceed lost contribution margin, dropping increases income.

• If lost contribution margin exceeds savings, keep the product.

Vertical Integration

This means controlling more of the supply chain by making a component yourself instead of buying it, or vice versa.

• Advantages: greater control over quality, supply, and timing.

• Disadvantages: higher investment, less flexibility, and potentially higher costs.

Make or buy

Compare the supplier's price with the costs you can actually avoid by making the item. Include opportunity costs if the freed-up capacity can earn money elsewhere. Ignore unavoidable fixed overhead.

special order

Compare the extra revenue with the extra costs. Include special shipping, modifications, setup costs, and opportunity costs when applicable. Ignore unchanged fixed costs.

limited resource

Divide contribution margin by the scarce resource used, such as machine minutes. Rank products from highest to lowest contribution margin per minute.

Sell or process further

Compare the additional revenue from further processing with the additional processing costs. Ignore joint costs incurred before the split-off point.

Net Present Value formula

PV of future cash inflows — initial investment

Present value of one future amount formula

future amount / (1 + r) ^n

Present value of an annuity formula

Annual cash flow × PV annuity factor

Payback period, equal cash flows formula

Initial investment ÷ Annual net cash inflow

Payback period, unequal cash flows formula

Full years before recovery + Unrecovered amount ÷ Next year's cash inflow

simple rate of return formula

annual incremental net operating income/ initial investment x 100%

profitability index formula

PV of future net cash inflows ÷ Initial investment

r

discount rate, expressed as a decimal

n

number of periods

initial equipment purchase

cash outflow

annual cash savings

cash inflow

working capital invested

usually an initial cash outflow

recovery of working capital

cash inflow at the end

equipment sale proceeds

cash inflow at disposal

depreciation

Noncash expense; not itself a cash outflow

NPV

Higher positive NPV is generally better for mutually exclusive projects

IRR

Higher return relative to the required rate

Payback

Shorter recovery period

Simple rate of return

Higher accounting return

Profitability index

Higher present value of inflows per dollar invested