Paper 2 formulas/calculations

Question 1

Price elasticity of demand

Answer 1

% Change in Quantity Demanded / % Change in Price

Question 2

Income elasticity of demand

Answer 2

% Change in Quantity Demanded / % Change in Income

Question 3

Gross Profit Margin (%)

Answer 3

Gross Profit / Revenue X 100

Question 4

Net Profit Margin (%)

Answer 4

Net Profit / Revenue X 100

Question 5

Moving Average

Answer 5

Previous Month + Current Month + Next Month / 3

Question 6

Working Capital

Answer 6

Current Assets – Current Liabilities

Shows how much cash is available on a day to day basis (liquidity)

Question 7

Capital Employed

Answer 7

Shareholder funds + Non current liabilities

Shows the long term finance of the business

Question 8

Depreciation

Answer 8

Historical Cost – Residual Value / Useful Life of Asset

Shows the reduction in value of a fixed asset over time

Question 9

ROCE

Answer 9

Net Profit before Tax / Shareholders’ Funds + Non current Liabilities X 100

Shows the profit as a % of the money invested in the business

Question 10

Current Ratio

Answer 10

Current Assets / Current Liabilities

Shows the ability of a business to pay its short term debts

Question 11

Acid Test

Answer 11

Current Assets - Stock / Current Liabilities

Same as the current ratio but - stock which is the least liquid C. Asset

Question 12

Gearing

Answer 12

Long-term liabilities / capital employed x 100

Shows how reliant the business is on loans for finance (over 50% risky)

Question 13

Decision tree

Answer 13

• Expected value = probability x outcome then add together for each option
• Net gain = expected value - initial cost

Question 14

Network analysis (Critical path)

Answer 14

• Shows the critical path which is the activities where there can be no delays if the project is to finish on time
• Calculates the earliest start time and latest finish time of each activity
• Calculates the float (spare) time on an activity. Float = LFT – Duration -EST

Question 15

Payback

Answer 15

The payback period is the time it takes for a project to repay its initial investment.

Question 16

Average Rate of Return

Answer 16

The average rate of return is a way of comparing the profitability of different investments
* Average Annual Profit / Cost of Investment x 100

Question 17

Net Present Value

Answer 17

1. Multiply each year’s income by its discount rate
2. Add them together
3. Deduct initial cost

If the net present value is positive, the investment is worthwhile.

Question 18

Special orders

Answer 18

Calculate the total contribution

• Total contribution = total sales revenue - total variable costs
• If the contribution is positive, the special order can be accepted. however, there may be other reasons why it is accepted or declined

Contribution per unit = selling price - variable cost per unit