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Final

# Final Exam Cheat Sheet

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Western University

Business Administration

Business Administration 2257

Alexander Miller

Fall

Description

PrCost Behaviore Statement Differential Analysis
FIRST SOE
Semi-Variable = taxi Differential working capital investment: amount of additional money that would be tied up in
1. Manager’s estimates for new sales volumene unit contributes toward recovery of fixed costs & then toward profit working capital: Investment? or disinvestment? INV+AR-AP
2. ASSUMPTIONSution = Selling Price - Variable Cost Per Unit INV = [Diff COGS/(360 days x yr)] xDays of INV
Contribution Margin Rate (what % of selling price can cover fixed assets) = Unit Contribution/Selling Price AR=[Diff Credit Sales/(360*yr)]xDays of AR
3.Breakevenility ratios needed for cogs, gross AP=[Diff Credit Purchases (or COGS)/(360*yr)]*Days of AP
Uniprofit &op x (see if need to do some Working capital:
Sales=Fixed Costs/Contribution Margin 1. does AR, INV, AP permanently change?
Cash Breakevenon one) 2. up or down?
4.Units = Cash Fixed Costs/(Selling Price-Cash variable costs/unit) 3. is it investment or disinvestment (sell)?
Sales = Cash Fixed Costs/((SP-Cash VC per unit)/SP) Differential ROI = (Differential Cash Flow/Differential Investment)*100
Target Profit Breakeven Differential payback = Differential Investment/Differential Cash Flow
Units= (Fixed Costs+Target Profit)/(SP-VC per unit) ****IN EITHER DO NOT include interest/financing costs only have operating decisions
Sales=(Fixed Costs+Target Profit)/((SP-VC per unit)/SP) payback = has to be able to payback investors
Breakeven with Multi-Products compare % to hurdle rate:
Sales = Fixed Costs/(Weighted Avrg Contr. Margin Rate) given & minimum target rate of return for project (always higher than bank rate)
Weighted Average: - ALL OTHER INFO OUTSIDE OF differential assumed to be CONSTANT
1. 2. - no income tax
1. Different btw alternatives
2. cash inflow/outflow (no amort)
3. future consideration (no past costs bc “sunk”)
- ROI- describe size of investors financial return relative to size of initial investment
-THESE ratios assume recurring annual cash inflow or return which is constant over time
1. Sub-unit Evaluation
- predict # of units sold
RISK ASSESSMENT: - calculate variable cost as % of sales
Margin of Safety
How much can projections be off before venture becomes breakeven proposition? - Sensitivity = selling price, units to be sold, variable & fixed
Margin of Safety = (Projected Sales-Breakeven Sales)/Projected Sales - What if? (what’s profit if lower selling price? what’s profit difference if units sold
Breakeven as % of Margin is 20% higher or lower than projected? what if variable/fixed goes up/down 5%?)
How much of the current market must be captured to breakeven?
=Breakeven Sales dollars(or units)/Total Market (dollars or units)
ROI = Recurring Annual Return/Initial Investment
Marketing - ASK QUESTIONS!
Define Marketing Challenge, Identify market opportunities, select target market,
decide on produce/service offerings, decide on distribution approach, how to - improve Product B or take out
- this shows you problems with product B, which you wouldn’t have noticed
attract customers, pricing, how to keep/grow customer base, ensure financials otherwise - BAD PRODUCT if no unit contribution(not contributing toward fixed
make sense (cost/results), How to learn (research)
Product Life: Introduction, Growth, Maturity, Decline assets) (doesn’t matter if negative net income)
Pull: marketing directed towards ultimate user (creates consumer demand) so
consumer asks store for product when then pulls goods thru distribution channel
Push: marketing directed toward retailers who are motivated thru advertising
allowances & discounts
Skimming: set high price to cover R&D cost, before competitors have smtg
similar (lwr price later)
Penetration: set low price to attract a lot of market share
Outline of Steps
1. Understand Organization
a. Business Size-up - Make a risk line
industry/environment analysis-opportunities/threats
consumer analysis
competitive analysis -KSF/sustainable?
corporate capabilities
b. Financial Size up
statement of cash flows
ratio analysis
contribution analysis
2. Assess Future Opportunities
a. Qualitative - Do nothing option? qualitative? quantitative?
b. Quantitative
i. Differential Analysis
ii. Contribution Analysis
iii. Breakeven Analysis
iv. Cash Budgeting
v. Sensitivity Analysis Projected Statements
- when made..how do we ensure these estimates? or
3. Decision alter policy to get better projections
-Pros/Cons - WRITE ALL ASSUMPTIONS Ratio Analysis:
How is business impacted? new insight? - divide 2001 tax with Net income before tax (tax / - All years, all competitor ratios
Action Plan: What are key priorities? Who will be responsible for them? How net income before tax) - **Give Assumptions (whether avrg or total)
will they be achieved? When will they be achieved? Consistent with firm’s goals.
All biz aspects must fit into overall strategic plan. Why is this worth doing? BS - MUST DO: AP/AR/INV (needed in projections)
Monitor results. Have an adaptive strategy. Cans/Needs/Wants. Potential - ANALYZE projected: do they match company’s - A ratio is high bc the numerator is high or the
outcomes? Risk? how to overcome cons. Convince!! So what? goals? denominator is low (look at BS & SOE to figure
4. Evaluate Effectiveness of Strategy - SENSITIVITY: what’s most important & what’s
a. Projected Statements most uncertain, Qualitatively talk about worst case out which one & state specific #’s to give more
b. Income Statement scenario detail
LIMITATIONS: - A ratio is low bc numberator is low OR
c. Balance Sheet - many assumptions & estimates denominator is high
b. Action Plan & Contingency Plan - imprecise --> can’t predict future
a. close can/need/want gap - ***For the purposes of this case assume industry
calculated ratios in the same way
“didn’t have time for sensitivity but I could’ve done..
- debt to equity ratio to see liklihood of receiving external financing Hurdle rate--> will it actually be over?
- high debt to equity = risky company
Financing Alternatives - high debt equity due to - debt increases & equity constant and equity down if no trend/industry say this would be useful
- consider: current debt, financing costs, accepted risk lvl, desire for control, but debt same Limitations
flexibility to respond to future financing needs & pattern of capital structure 1. Quantitative only (there are external factors)
- Internal: improve cash flows= difficult to do quickly,cut off unnecessary - the closer to 100%, the more control the owners are losing
expenses/those that won’t affect sales - raise publicly if qualify but usually thru investors 2. standards of comparison imperfect
- adjust working capital-amount that remains if all current obligations paid off - dividends can be postponed 3. difficult to compare with other fir

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