The data tool box

Question 1

Identify trends

Answer 1

Look at the information given. A simple comparison of changes over time of turnover, costs and profit can be a good starting point

Gross profit margin
Net profit margin

Differences between gross and net profit are often caused by changes in overheads

Check for:

• changes in methods of accounting for overheads
• disproportionate changes in overhead costs

Question 2

Analysing investment decisions

Answer 2

If a new investment is proposed consider how it will be funded in which case gearing and liquidity ratios may be useful.

A key issue will also be the return generated by the investment and ROCE and payback periods can help here.

ROCE: PBIT/TALCL

Payback period: The time taken for the net return to exceed the cost of the investment. Discounted payback can be used to take into account the time value of money.

Question 3

Appraising a product line

Answer 3

Consider whether a product is covering its costs and assessing the sensitivity of a business to change:

Breakeven point (units) = fixed costs/contribution per unit

Breakeven revenue = breakeven units x sales revenue

Margin of safety (units) = budgeted volume - BEP

Margin of safety (% budget) =( budgeted volume - BEP) / budget volume

Question 4

Probability and expected values

Answer 4

The examiner may give you details of the probability of certain outcomes for example a probability of a particular level of revenue

eg
The probability of getting £100 is 40%
The probability of getting £150 is 60%

The expected value is
£100x40%       40
£150*60%        90
                       ------
                        130

over the long run the organisation will expect to receive on average revenue of £130 however in practice it is unlikely there will ever be revenue of £130.

When we are making a decision be wary of negative outcomes. Whilst the expected value may be positive the potential downside may be too great a risk.