Business: Variable Cost Ratio Essay

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* Focus on concepts * Ratio analysis * Leverage * Balance sheet/income statement * Ratios * Understand categories divided up into and know what they are telling you * Liquidity measures are looking at current assets- when we say a company is liquid we are looking at their current liabilities and how quickly we turn assets to cash and pay back the liabilities * Debt to equity * Dupont analysis: what is influencing the return ratios- gives management the opportunity to look through them * Z-score: the probability of what the likely hood the company will go into bankruptcy- manufacturing, non-manufacturing equations * You can pull off the balance sheet. * You cannot pull of the balance sheet with a publicly traded * Market price * shares outstanding (market price is not onincome statement or balance sheet…. Shares outstanding are on the equity) * issued shares-treasuring shares=outstanding shares) * issues to be aware of during ratio analysis * make sure the numbers are decent numbers- we should use audited financial statements * comparative analysis- we need to make sure that we have differences in ratios that different accounting policies aren’t different * if companies take bath write offs- huge write offs of assets- lower depreciation which turn into higher earnings * inflation impacts (competitive and trend analysis) * currency exchange impacts (competitive and trend analysis) * industry averages- throw out the caution that the companies operations fit the industry averages * do ratios on historical data, but there is no guarantee that the future will be the same as the past. Use judgment to what the future might look like. * Breakeven analysis * A company reaches break even when (When EBIT =0) you covered your fixed costs. * Quantity, sales, target volume equations * Be able to calculate for sales dollars or quantities * Contribution margin * On a per unit basis- the contribution that every unit is making to cover fixed cost and then it is the amount of pre tax profit you are earning. * On a per unit basis does it represent EBIT per unit? No- fixed costs do not go per unit… it is a pre tax profit per unit * What is the compliment of the variable cost ratio- if you take 1- variable cost ratio you get the profit contribution ratio * Profit contribution ratio and the variable cost ratio must equal 1. * Profit contribution ratio-profit per dollar of sales ** before fixed costs * Leverage- you must have fixed costs * the higher the level of fixed costs the degree of operating leverage is higher * direct relationship with fixed costs & leverage * the closer we operate to ebit the higher the leverage is * if the EBIT is 0 the DOL is undefined (infinite) * DOL of 1 is when there is no leverage * When we are at breakeven we are just covering our fixed costs so we have a high degree of risk because there is a big chance we will suffer a loss. * The further we get away from EBIT (farther away from 0) the DOL falls because the fixed costs become a
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