Contribution margin - Fixed costs = Profit, so Contribution margin = Fixed costs + Profit.

Contribution margin ratio = contribution margin/sales revenue, which equals contribution margin per unit/sales price
per unit.

High-low
Variable cost per unit = (Difference in total cost) / (Difference in activity)
Fixed cost = Total cost - (Variable cost per unit x Activity)

Break even- the point where zero profit is earned.

Profit equation
Unit price Q - Unit variable costs Q - Total fixed costs = Profit

Sharona Company has sales of $100,000, variable costs of $4 per unit, fixed costs of $25,000, and a profit of
$15,000. How many units were sold?

$100,000 - $4 Q - $25,000 = $15,000, so Q = 15,000.

Cost structure - how a company uses variable versus fixed costs.

Unit sales
price

Unit variable
costs
Unit contribution
margin
Contribution margin
ratio
25.00 $ 10.00
15.00 60
%
36.00
12.00 24.00
67
%
40.00
30.00 10.00
25 %

Which of the following costs is not relevant in a special-order decision? Fixed overhead

Direct fixed costs can be traced to a specific segment.

Managers should maximize the amount of contribution margin earned per unit of constrained resource

Depreciation is a non-cash expense, so it would not be included as part of annual cash flows.

Persius Corp is considering the purchase of a new piece of equipment. The cost savings from the equipment would
result in an annual increase in net income after tax of $182,000. The equipment will have an initial cost of $486,000
and have a 5 year life. If the salvage value of the equipment is estimated to be $116,000, what is the annual net cash
flow?

$66,000

$256,000

$298,000

$108,000
Depreciation = ($486,000 $116,000) / 5 = $74,000. Net income $182,000 + depreciation $74,000 = Annual net
cash flow $256,000

Accounting rate of return = annual income from investment/initial investment
= $270,000 / $1,000,000 = 27.0%.

Payback= Initial investment/Annual net cash flow

The net present value method compares the present value of a project's future cash flows to the initial investment; the
difference between the two is the net present value.

A positive NPV means that a proposed project will generate a return in excess of the cost of capital, creating
economic value for the company and its shareholders.

Jonas Inc. is considering whether to lease or purchase a piece of equipment. The total cost to lease the equipment
will be $127,000 over its estimated life, while the total cost to buy the equipment will be $80,000 over its estimated
life. At Jonas's required rate of return, the net present value of the cost of leasing the equipment is $81,500 and the
net present value of the cost of buying the equipment is $75,000. Based on financial factors, Jonas should

lease the equipment, saving $47,000 over buying.

lease the equipment, saving $6,500 over buying.

buy the equipment, saving $47,000 over leasing.

buy the equipment, saving $6,500 over leasing.

Lemur Company is considering a project that has estimated annual net cash flows of $51,000 for four years and is
estimated to cost $149,000. Lemurs hurdle rate is 10 percent. (Use Table 4.)

Required:
(a) Determine the net present value of the project. (Negative amount should be indicated by a minus sign.
Round your intermediate calculations to 4 decimal places and final answer to 2 decimal places. Omit the
"$" sign in your response.)

Net present value
$
12,664.90 3


(b) Based on part (a), determine whether project is acceptable to Lemur.
Acceptable
v: 04-26-21
Explanation:
(a)
Year
Annual
Cash Flow
PV
Factor
(10%) Present Value
0 ($ 149,000) - $( 149,000.00)
1-4 $ 51,000 3.1699 161,664.90

NPV $ 12,664.90









(b)
The positive NPV shows that the present value of the future cash inflows for the project is greater than the original
investment it requires. A positive NPV suggests the project is acceptable.

Debenture- debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the
general creditworthiness and reputation of the issuer.
Annuity Due- An annuity whose payment is to be made immediately, rather than at the end of the period.
Municipal Bond- debt security issued by a state, municipality or county to finance its capital expenditures.
Municipal bonds are exempt from federal taxes and from most state and local taxes