MAC3761
FINANCE
COST-VOLUME PROFIT ANALYIS – 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 will depend on the provided information.
(a) Total sales – Total variable cost (VC) – Total fixed cost (FC) = Net profit before tax
Re-arrange this equation to give you:
Total sales = Net profit before tax + Total FC + Total VC
Therefore Sales per unit = Total sales / Number of units sold
(b) Total sales – Total VC = Total contribution margin (CM)
Re-arrange this equation to give you:
Total sales = Total CM + Total VC
Therefore Sales per unit = Total sales / Number of units sold
(c) Sales per unit = CM per unit + VC per unit
2. Break-even point (BEP) in UNITS
BEP (units) = Total FC / CM per unit
where CM per unit = Sales per unit – VC per unit
3. Break-even point (BEP) amount
BEP (amount) = Total FC / CM ratio
where CM ratio = CM per unit / Sales per unit
4. Units sales required to earn target profit
Target sales (units) = Total FC + Target net profit before tax / CM per unit
5. (a) To include income taxed in the CVP model, you have to convert a before-tax profit into an
after-tax profit:
After-tax profit = Before-tax profit x (1 – tax rate)
(b) To exclude income taxes from the CVP model, you have to covert an after-tax profit into a
before-tax profit:
Before-tax profit = After-tax profit / (1 – tax rate)
6. Margin of safety (MS)
in UNITS = Projected or actual sales (units) – BEP (units)
as a % (ratio) = MS (units) / Projected or actual sales (units) x 100
, MAC3761
FINANCE
RATIO ANALYSIS
1. Liquidity ratios:
o Current ratio = Current assets (CA) / Current liabilities (CL)
o Quick ratio (acid test) = (CA – Inventory) / CL
2. Asset management ratios:
o Inventory turnover* = Cost of goods sold (COGS) / Inventory
o Days sales outstanding = Accounts receivable / (Sales/365)
o Fixed asset turnover ** = Sales / Net fixed assets (FA)
o Total assets turnover = Sales / Total assets
3. Debt management ratios:
o Total debt to total asset = Liabilities / Assets
o Times interest earned = EBIT*** / Interest
o Cash Coverage ratio = (EBIT + Depreciation) / Interest
4. Profitability ratios:
o Gross profit = (Sales – COGS) / Sales
o Operating profit margin = Operating income / Sales
o Net profit margin = Net income / Sales
o Return on assets (ROA) = Net income / Assets
o Return on equity (ROE) = Net income / Common equity****
5. Market values:
o Price/Earnings (P/E) ratio = Market price per share / Earnings per share
o Market/Book ratio = Market price / Book value
o Dividend yield = Dividends per share / Market price
*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
FINANCE
COST-VOLUME PROFIT ANALYIS – 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 will depend on the provided information.
(a) Total sales – Total variable cost (VC) – Total fixed cost (FC) = Net profit before tax
Re-arrange this equation to give you:
Total sales = Net profit before tax + Total FC + Total VC
Therefore Sales per unit = Total sales / Number of units sold
(b) Total sales – Total VC = Total contribution margin (CM)
Re-arrange this equation to give you:
Total sales = Total CM + Total VC
Therefore Sales per unit = Total sales / Number of units sold
(c) Sales per unit = CM per unit + VC per unit
2. Break-even point (BEP) in UNITS
BEP (units) = Total FC / CM per unit
where CM per unit = Sales per unit – VC per unit
3. Break-even point (BEP) amount
BEP (amount) = Total FC / CM ratio
where CM ratio = CM per unit / Sales per unit
4. Units sales required to earn target profit
Target sales (units) = Total FC + Target net profit before tax / CM per unit
5. (a) To include income taxed in the CVP model, you have to convert a before-tax profit into an
after-tax profit:
After-tax profit = Before-tax profit x (1 – tax rate)
(b) To exclude income taxes from the CVP model, you have to covert an after-tax profit into a
before-tax profit:
Before-tax profit = After-tax profit / (1 – tax rate)
6. Margin of safety (MS)
in UNITS = Projected or actual sales (units) – BEP (units)
as a % (ratio) = MS (units) / Projected or actual sales (units) x 100
, MAC3761
FINANCE
RATIO ANALYSIS
1. Liquidity ratios:
o Current ratio = Current assets (CA) / Current liabilities (CL)
o Quick ratio (acid test) = (CA – Inventory) / CL
2. Asset management ratios:
o Inventory turnover* = Cost of goods sold (COGS) / Inventory
o Days sales outstanding = Accounts receivable / (Sales/365)
o Fixed asset turnover ** = Sales / Net fixed assets (FA)
o Total assets turnover = Sales / Total assets
3. Debt management ratios:
o Total debt to total asset = Liabilities / Assets
o Times interest earned = EBIT*** / Interest
o Cash Coverage ratio = (EBIT + Depreciation) / Interest
4. Profitability ratios:
o Gross profit = (Sales – COGS) / Sales
o Operating profit margin = Operating income / Sales
o Net profit margin = Net income / Sales
o Return on assets (ROA) = Net income / Assets
o Return on equity (ROE) = Net income / Common equity****
5. Market values:
o Price/Earnings (P/E) ratio = Market price per share / Earnings per share
o Market/Book ratio = Market price / Book value
o Dividend yield = Dividends per share / Market price
*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
