3.6.3

Question 1

businesses need to assets to use in producing goods and services so they invest in:

Answer 1

-land and buildings
-machinery and vehicles
-new products
-training staff
-research and development

Question 2

what is an average rate of return?

Answer 2

-deciding whether an investment is worthwhile
-compares the average yearly profit from an investment throughout its life with the cost of the investment
-a higher percentage is better

Question 3

how to calculate average rate of return?

Answer 3

1. calculate average yearly profit by dividing the total profit of the investment by the number of years
2. calculate ARR (average yearly profit / cost of investment project) x 100

Question 4

what is break-even point?

Answer 4

-the volume of sales needed to ensure that total revenue is equal to total costs
-at this point no profit or loss is made

Question 5

how do you calculate the margin of safety?

Answer 5

current output - break even output

Question 6

margin of safety

Answer 6

measures the amount by which a business’s current level of production exceeds its break even level of output

Question 7

advantages of the break even anaysis

Answer 7

-helps managers to see the effects in change in costs
-many businesses use bank loans and banks are more likely to agree to a loan if the business’s managers provide future finances
-helps understand the level of risk

Question 8

disadvantages of the break even analysis

Answer 8

-assumes that a business sells all of the output it produces
–many businesses operate in markets where costs and prices change rapidly, this makes break even charts of less value as they are inaccurate
-not making money