Calculation practice questions

Question 1

Calculate the gearing ratio of the business

Current assets £300
current liabilities £180
non-current liabilities £120
total equity £200

(£’000)

Answer 1

Non-current liabilities = £120,000
Capital employed = (120,000 + 200,000) = £320,000

Gearing ratio =
£120,000
—————– x 100 = 37.5%
£320,000

Question 2

True or False: A higher gearing ratio indicates a higher level of financial risk.

Answer 2

True

Question 3

Which of the following is considered a disadvantage of high gearing?

A) Increased financial stability
B) Higher interest payments
C) Greater investor confidence

Answer 3

B) Higher interest payments

Question 4

Calculate the gearing ratio of the business based on the additional borrowing.

Current assets £10,800
Current liabilities £6,000
Non-current liabilities £1,200
Total equity £3000
(£’000)

The business is considering an investment of £2,800,000 all of which would need to be funded via additional long term borrowing.

Answer 4

Non current liabilities after additional borrowing £1,200,000 + £2,800,000 = £4,000,000

Capital employed after additonal borrowing = £4,000,000 + £3,000,000 = £7,000,000

Gearing ratio after additional borrowing =
£4,000,000
———–.—– x 100 = 57.14%
£7,000,000

Question 5

Calculate the capacity utilisation of the business last year

Last year a business produced 135,000 units and its total capacity was 225,000 units

Answer 5

last year=

135,000
—————-.
225,000

x 100

=60%

Question 6

Calculate the capacity utilitsation of the business last year

A manufacturer is currently operating at 80% capacity utilisation, producing 200,000 units per year.

Next uear, due to securing a new contract, the manufacturer will produce a further, 70,000 units.

In order to fulfill this contract, the manufacturer intends to increase its capcity by 20%

Question 7

Based on the data in table 3, calculate the fixed costs of the business

Selling price- £7.50
Total revenue- £22,500
Total contribution - £15,900
Total costs - £20,650

Answer 7

Fixed costs= total contribution- profit

Profit = total rev- total costs

£22,500 - 20,650 = £1850

£15,900 - £1850 = £14,050

Question 8

Based on the data in table 3, calculate the contribution per unit

Selling price- £7.50
Total revenue- £22,500
Total contribution - £15,900
Total costs - £20,650

Answer 8

Number of units= total revenue/ selling price
£22,500/7.50 = 3000 units

contribution oer unit = total contribution/ number of units
= £15,900/ 3000 = £5.30