Net multiplier = breakeven 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 = breakeven 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.

Yuan, multiplying by the target profit constitutes a markup. Markup 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.

Hi Matthew,
Thank you for the explanation. I think I got this now. There are 2 issues here. First, "inverse" in this case is "1target profit rate". So if the target profit is 20%, the inverse of it will be 80%, not 1/0.2
Second, the breakeven + the target profit should be 100%, not 120%
Please sign in to leave a comment.
Comments
3 comments