6.3 Financial terms + calculations Flashcards
Gross profit formula?
Sales revenue - cost of sales
Formula for net profit?
Gross profit - expenses
Formula for gross profit margin?
Gross profit / revenue x 100
Formula for net profit margin?
Net profit / revenue x 100
What is average rate of return?
- When making investment decisions, the owners of abusiness will consider how much profit an investmentcan make.
- A business can invest money in a variety of ways suchas, spending on advertising, or buying new equipment.
why is ARR used?
We use ARR to help us identify which investment is themost profitable.
what is the formula for ARR?
(Average annual profit (total profit/no. of years) / cost of investment) x100
What are fixed costs and what is the abreviated name?
Fixed costs are costs that do not change when we make more or less of a product (known as FC)
What are variable costs and what is the abreviated name?
Variable costs are costs that do change when we make more or less of a product (known as VC)
How to work out VC?
find out costs for one unit
What is TC and what is the formula for it?
Total costs known as TC - worked out by FC + VC
What are examples of fixed costs?
- Salaries
- Rent
- Electricity
What are examples of variable costs?
- Gas
- Water
- Advertising costs
- Wages
- Raw materials
What does SP stand for?
selling price
What is the definition of break even?
When total revenue is equal to total costs, at this point a business is making neither a loss or a profit (when total revenue and total costs are equal)
what is the definition for total revenue?
income that the business receives
What is the equation for profit?
Total revenue (TR) - total costs (TC) = profit
What is the equation of how many products must be sold to break even?
Fixed cost / (selling price - variable cost)
what is contribution?
(selling price - variable cost)
how to answer the break even question for exam? (3 marks)
- write the formula
- Show your working
- Answer (always round up)
What are the benefits of Break Even?
- It gives you a target to work towards
- Break even information can be used to make judgements about prices
- Supports applications for bank loans
what are the drawbacks of BE?
- Break even assumes the firm sells all the products at a single price
- Time consuming to do if you sell more than 1 product
- Maybe inaccurate
What is the definition of margin of safety?
The difference between the actual level of sales and the break even point
what is the equation for margin of saftey?
Actual sales - break even point
why is it good to have a high margin of saftey?
gives you room to have drops in sales and remain financially stable rather than struggle under low points
