Transcript Financial Properties - St. John's University
• 1 - Revenue
– Single Product R = P x Q – Multi Product R = PiQi
Financial Properties
• 2 – Cost
– VC vs. AFC – AVC vs. AFC – MC vs. Incremental Cost – Sunk Cost – Programmed Cost – Avoidable Cost – Fungible Cost – Opportunity Cost – Relevant Cost – Joint Cost – Accounting Alocation
• 3 – Margins
• Gross • Trade • Net Profit – A: Gross Margin (Profit) Total GM = R – CGS Unit GM = P – Unit CGS • Four Factors – Q – P – Cost – Product Mix – B: Trade Margin Mfgr Wholesaler Retailier For a Single Channel: Pm = P x (1-%Discount) Ex: Pc = $2.00
% Discount = 0.03
$1.40 = 2.00 x 0.70
Also Pc = Cost/(1-%Discount) For N Channels Pc = Cost/(1-%Discount) Cost = Pc(1-%Discount)
– C: Net Profit Margins (before taxes)
• 4 – Contribution Analysis
BEQ = FC / (P-AVC) R -CGS_______ % CM = (P-AVC) / P GPM BER = _FC = BEQ x P -Other VC % CM -FC_________ Net Profit Margin (NPM) • Note % of NPM = NPM R BER = P x BEQ = P x FC / (P-AVC) Divide by P P x [FC / P – AVC]=FC P P %CM
ILLUSTRATION Channel
Manufacturer Wholesaler Retailer Consumer
Unit CGS
2.00
2.88
3.60
6.00
Calc. of Prices and Margins
Price to Consumer Retailer Margin Wholesale Price Wholesale Margin Manufacturer Price Manufacturer Margin Manufacturing Cost
GM
0.88
0.72
2.40
GM%
.306(.88/2.88) .200(.72/3.60) .400(2.40/6.00)
Make-UP%
.44(.88/2.00) .25(.72/2.88) .67(2.40/3.60) $6.00
x 0.40
2.40
3.60
x 0.20
0.72
2.88
x 0.306
0.881
$2.00
SP = CGS x Product of Mark-Ups
= 2.00 x (1.44 x 1.25 x 1.67) = $6.00
CGS = SP/Product of Mark-Ups
= 6.00 / 3.00 = $2.00
Alternatively, SP = Cost / Product (1-%D)
= 2.00 / (1-.4)(1-.2)(1-.306) = $6.00
Cost = SP x Product (1-%D)
= 6.00 x (1-.4)(1-.2)(1-.306) = $2.00
• (1) (2) Applications Sensitivity Analysis: Vary P or AVC or FC to determine BEQ Calculate Q to achieve Profit Objective ( ) Qp = FC + P P – AVC Suppose objective is to achieve a profit of X% on sales R – C = % R PQ-AVC(Q)-FC = % PQ Q (P-AVC) – FC = % PQ Example: P=$25; AVC=$10; FC=$200,000; % = .20
Q(25-10) – 200,000 = .20
25Q Q = 20,000
• 5 – Cannibalization
Assume: • X X+ P 1.00 1.10
AVC .20
.40
CM .80 .70
• Qx = 1,000,000 if X+ is not introduced; = 5,000,000 if X+ is introduced Qx+ = 1,000,000 if X+ is introduced • Assume no incremental FC
Query: Should X+ be introduced?
Solution: Method A X+Gain 1,000,000x.70 = 700,000 Cannibalization Loss 500,000 x .81 = 400,000 300,000 Method B Contr: w/o X+1,000,000x.80= 800,000 Contribution with X and X+: X 500,000 x .80 = 400,000 X+ 1,000,000 x .70 = 700,000 Total Contr. Of X + X + = 1,100,000 Contr of X alone = 800,000 Net Gain from Add. of X+ = 300,000 • • • •
• 6 – Financial Concepts and Ratios
– A –Liquidity
Working Capital
= Current Assets – Current Liabilities
Current Assets
= Cash, Accounts Receivable, Inventory, Prepaid Expenses
Current Liabilities
= Accounts Payable, Income Taxes
Operating Leverage
= FC/VC
Current Ratio =
Assets Liabilities
Quick Ratio
=Assets-Inventory Liabilities
• •
–
Asset Management
Inventory Turnover
= Sales / Inventory
Asset Utilization
= Sales / Total Assets • • •
–
Profitability Ratios
Profit Margin in Sales
= Profitability Before Taxes / Sales
Return on Assets
= Profitability Before Taxes / Total Assets
Return on Investment
= Net Income / Investment • (Investment = Total Assets) Net Sales X Net Income Investment Net Sales
ROI
= f (Stockturn, ratio of CGS to Net Sales)
•
Net Present Value Illustration
Assumptions Cost of Capital Sales from New Product New Equipment Useful Life of Equipment Depreciation Salvage Value Cost of Goods and Expenses Tax Rate
Calculating Net Cash Flows
10% $1,000,000/yr $700,000 10 yrs 10% / yr $100,000 $700,000 50%
GI = Sales – CGS
= 1,000,000 – 700,000 = 300,000
Taxable Income = GI – Depreciation
= 300,000-60,000 [(700,000 – 100,000) x .10] = 240,000
Net Income = Taxable Income – Tax
= 240,000 – 120,000 (240,000 x .5) = 120,000
Net Cash Flow = Net Income + Depreciation
= 120,000 + 60,000 = 180,000
Year
1 2 3 4 5 6 7 8 9 10
Net Cash Flow
$180,000 $180,000 $180,000 $180,000 $180,000 $180,000 $180,000 $180,000 $180,000 $280,000
10% Discount Factor
0.9091
0.8264
0.7513
0.683
0.6209
0.5645
0.5132
0.4665
0.4241
0.3855
PV
$163,638 $148,752 $135,234 $122,940 $111,762 $101,610 $92,376 $83,970 $76,338 $107,940 $1,144,560