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4 Important Formulas

4 Important Formulas. Breakeven Point: Sales Volume Breakeven Point: Selling Price Current Ratio Quick Ratio. Breakeven: To determine Sales Dollar Volume Example :. Calculate Contribution M argin: All v ariable costs A nnual sales 2. Calculate Sales Dollar Volume: Total Fixed Costs

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4 Important Formulas

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  1. 4 Important Formulas Breakeven Point: Sales Volume Breakeven Point: Selling Price Current Ratio Quick Ratio

  2. Breakeven: To determine Sales Dollar VolumeExample: Calculate Contribution Margin: All variable costs Annual sales 2. Calculate Sales Dollar Volume: Total Fixed Costs Contribution Margin • Variable costs: $337,000 (cost of goods sold) • Other variable costs: $42,750 • Annual Sales: $495,000 • Total Fixed costs: $78,100

  3. Breakeven: To determine Selling Price Per Unit Totalfixedcosts Variablecostperunit Breakeven Selling Price { Quantity } { } Profit + + x produced = Quantityproduced Example: Breakeven Selling Price $110,000 50,000 { } $0 + x + 6.98 = 50,000 = $9.18 per unit Ch. 10: Pricing Strategies

  4. Current Ratio • Current Ratio - Measures solvency by showing the firm's ability to pay current liabilities out of current assets. Example: Current Ratio = Current Assets = $686,985= Current Liabilities Current Liabilities $367,850 = 1.87 (written as 1.87:1) The 1.87:1 should be compared to the current ratios of similar businesses in the same industry. The higher the first number, the better.

  5. Calculate the Current Ratio for Northeast Art Supply (using text pg 450) • What is the formula for Current Ratio? Current Assets Current Liabilities • How much are their Current Assets? • How much are their Current Liabilities? • So what is their Current Ratio? • If the current ratio for art supply stores is 2:1, how does Northeast Art Supply compare to that?

  6. Quick Ratio Quick Ratio (also called the “Acid Test”) - Shows the extent to which a firm’s most liquid assets cover its current liabilities. The quick ratio REMOVES inventory from the equation because it is not a liquid asset. Example: Total Current Assets: $686,985 Current Liabilities (not long-term liabilities!): $367,850 Inventory: $455,455 Quick Ratio = (Total Current Assets-Inventory) = Current Liabilities = $686,985-455,455 $367,850 =.63:1 (This means for every $1 of current liabilities, this company has 63 cents it could immediately apply if it had to pay off its current liabilities.)

  7. Calculate the Quick Ratio for Northeast Art Supply (using text pg 450) • What is the formula for the Quick Ratio? Cash+Securities+Receivables Current Liabilities • How much is their Cash, Securities, and Receivables? • How much are their Current Liabilities? • So what is their Quick Ratio? • If the Quick Ratio for art supply stores is 1:1, how does Northeast Art Supply compare to that?

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