Net multiplier = break-even rate / inverse of target profit

Could someone explain this function and the relationship between the Net multiplier and target profit?

1. Why not write this as

"Net Multiplier=Break Even*Target Profit"

2. Is the target profit a percentage number set by the firm based on the market and history of a similar project? Say 20%.If this is true, it seems to me that the "Net multiplier should = break-even rate * 1 + target profit rate".

For example, if breakeven rate = 2.3, target profit rate = 12%, than the

Net multiplier = 2.3 * 1.2 = 2.76

3. If we increase the Net Multiplier by increasing the indirect labor (which also means higher overhead), how would that benefit the firm? The money is spent after all and does not become the profit.

Valerie Galchenko August 26, 2022 18:08

https://are5community.ncarb.org/hc/en-us/community/posts/1500001055281-The-ONLY-formula-you-need-to-successfully-solve-ALL-financial-questions-on-PcM-and-PjM-

Yuan Ma August 27, 2022 01:42

Hi Valerie,

Thank you for your response. I did see this post before. But when I try to derive the formula myself, it still did not make sense as to these three questions. Could you elaborate on this formula? Thank you.

Matthew Bowers August 28, 2022 21:30

Yuan, multiplying by the target profit constitutes a mark-up. Mark-up and profit are not the same thing. Here is a discussion where I explain the difference in more detail.

And here is a more cleanly formatted 'master formula' that you need to know heading into the exam. It's important that you understand the relationships, not just memorize the formula.

Net multiplier = break-even rate / inverse of target profit

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