Nike Enterprises sells widgets for $10 a piece which cost them $6 to make. In a good year (probability 50%), the company sells 150,00 widgets and in a bad year only 100,000. The company faces fixed costs of $200,000. The company can borrow at 8% and the unlevered equity ahs a required rate of return of 12%. The company now has a 30% tax rate. 1. Populate a very basic pro-forma income statement for the bad and the good year for the unlevered firm. 2. Compute the value of the unlevered firm under the perpetuity assumption. 3. Adjust the pro-forma statements under the assumption that the firm takes on $1.25m of perpetual debt
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
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