ALL FORMULAS FOR FNSACC507A Provide Management Accounting Information COST VOLUME‐PROFIT ANALYSIS MAC 3702

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)

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*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