Business Calculations And Analysis

Question 1

What is contribution and how is it calculated

Answer 1

This is the amount that a product pays towards the fixed costs of the business

= price per unit - variable cost per unit

Question 2

Break even analysis?

Answer 2

Once a firm knows it’s total costs and revenue it can calculate it’s break even point

Question 3

Calculating break even point

Answer 3

= fixed costs dived contribution

Question 4

If break even point isn’t reachable

Answer 4

Cut costs

• cheaper raw materials?
• cheaper premises?
• do we need all the staff we currently budget for?

Raise prices

• is this practical?
• are the customers willing to pay a higher prices?

Broaden the product range

• can complementary products be sold to boost sales?
• what are your competitors charging?

Question 5

The margin of safety!

Answer 5

The amount by which demand can fall before a firm incurs a loss

Total output - break even output

Question 6

There are 3 ways a business will spend money?

Answer 6

Paying overheads - need to be paid to keep business running

Invest in assets - such as machinery which will allow the business to do more

Buying raw materials - these are resources used as part of production

Question 7

Advantages of payback

Answer 7

1. Extremely simple
2. Used for new technology items as can be defined as expected life of item
3. Helps present cash flow issues

Question 8

Disadvantages of payback

Answer 8

1. Cash earned after payback period is ignored

2. Doesn’t take into account that inflation has a major effect on the value of money over time

Question 9

Accounting rate of return?

Answer 9

Measures the net return each year as a percentage of the initial cost of the investment

Profit per annum divide cost x 100

Question 10

Calculating profit

Answer 10

Profit = total revenue - total costs