Variable Costs: costs that vary in direct proportion to changes in activity (e.g., materials and direct labor).

Fixed Costs: Costs that remain constant in total regardless of changes in activity (e.g., rent or insurance).

Calculate the break-even volume in units. Fixed Costs FC FC Break-even in Units=________________________=____ = _______ = Unit Contrib Margin(P-V ) P-V 2,400 1,000 100,000 _______ = 71.4 1,400

b) If the welfare agency needs a surplus of $6,000 calculate the break-even volume in units. Target Surplus Level = FC + Target Surplus 100,000 + 6,000 106,000 ________________= ______________ = ________ = 75.7 Unit Contrib Margin(P-V ) 2,400 1,000 1,400 =========== FC = 100,000 VC = 25 each Costoriginal = 50 / hour Costnew = 65 / hour Fixed Costs 100,000 100,000 Break-even in Unitsoriginal=________________________ = ____ = _______ = 4,000 Unit Contribution Margin (P-V)s 50-25 25 Fixed Costs Break-even in Unitsnew=________________________ = Unit Contribution Margin (P-V)s 100,000 100,000 ____ = _______ = 2,500 65-25 40

ps6700 assign2 2008.doc

Contribution Margin = Revenue Variable Costs Unit Contribution Margin = Unit Revenue - Variable costs per unit (P-V)

R ev en ue

Bre ake ven Poi nt

M on ey

-------------------- Current ratio = Current Assets Current Liabilities 1.3

Current ratio for unrestricted current assets = Current Unrestricted Assets Current Unrestricted Liabilities

Un its

= 1,000,000 = 15.4 650,000 = 400,000 =

Acid-test or quick ratio = Quick Unrestricted Assets = 150,000+ 50,000 + 40,000 = .80 Current Unrestricted Liabilities 300,000 Accounts receivable turnover = Fees for Services on Credit = Average Net Accounts Receivable 10,000 Days to collect on receivables = 365 = ` AR Turnover 2 ` 365 = 182 20,000 = 2

ps6700 assign2 2008.doc

Fi xe d C os t
300,000

V ar ia bl e C os ts

T ot al C os ts

 Total revenue needed on a daily average = Total Revenues (prior year) = 400,000 = 1,095.9 365 365 Ratio of expenses to revenue = Operating Expense = 350,000 = .88 Total Revenue 400,000 Ratio of fund raising expenses to donations = Fund raising costs = 25,000 = .25 Total donations 100,000 Profit margin = Revenue Expense = 400,000 380,000 = .05 Revenue 400,000 Operating margin = Operating Revenue Operating Expense = 300,000 350,000 = -.125 Operating Revenue 400,000 Return on fund balance (net assets) = Total Revenue Total Expense = 400,000 380,000 = .80 Average Net Assets 25,000

Total revenue needed on a daily average: Decline in revenue may indicate ineffectiveness. (Membership decrease or grant refusal) Ratio of expenses to revenue: Identifies controllable and uncontrollable costs. Lower ratio indicates better cost control Ratio of fund raising expenses to donations: Identifies controllable and uncontrollable costs. Lower ratio indicates better cost control. Addresses if fund raising costs are excessive for funds obtained or not. Profit margin: Higher ratio shows better operational performances (profit). Must be strong and/or increasing to allow for expansion and stability. Operating margin: Higher ratio is better. Excludes non-operating sources and focuses on how the operating activities perform (without contributing cash). Return on fund balance (net assets): Indicates how efficiently the fund balance has created the years surplus. Higher better.

ps6700 assign2 2008.doc

---------------Present Value: P (1 + .12)3 = 5,000 P (1.4049) = 5,000 or .71178(5,000) $3,558.9

Future amount: 140,987 80,000 = 1.76234, 1.12 (x) 5 years

Future amount: 100,000 (1+x)10 = 259,067 1.76234, 1.12 (x) 2.5907 10 % Present Value of Ordinary Annuity for Mixed Cash Inflows:: Year 1 2 3 4 Cash inflows 50,000 10,000 4,000 2,000 6%, n .943 .890 .840 .792 Present Value 47,150 8,900 3,360 1,584 $60,994

Therefore, investing $100,000 for $60,994 is NOT a good investment. The cash inflow from an annuity is $25,000 for 5 years at 5%. What is the present value? Present Value of Ordinary Annuity: P = 25,000, 5%, 5 years 4.452 (25,000) = $111,300

ps6700 assign2 2008.doc