Theme 2

Question 1

Contribution per unit

Answer 1

Selling price - variable cost

Question 2

Total contribution

Answer 2

Revenue - total variable costs

Question 3

Contribution definition

Answer 3

The amount of money left over after variable costs have been taken from revenue. The money contributes to fixed costs and profit.

Question 4

BE point

Answer 4

Where total revenue and total costs are the same

Question 5

Break even output

Answer 5

Fixed costs/contribution

The output a business needs to produce so total revenue and costs are the same

Question 6

Margin of safety

Answer 6

The range of output between break even level and the current level of output, over which a profit is made

Question 7

Why usebreak even analysis

Answer 7

Used to make decisions about the future, answers ‘what if’ questions

Question 8

Limitations of BE analysis

Answer 8

>unchanging conditions
>assumes all output is sold 
>assumes total cost and total rev lines are straight 
>some fixed costs may change 
>relies on quality and accuracy of data

Question 9

Budget definition

Answer 9

Quantitative plan agreed/prepared in advance. A budget is what the firm want to happen, based on past trading records.

Question 10

Name 6 Purposes of a budget

Answer 10

>Motivation
>communication
>co-ordination
>Efficiency
>Planning 
>Control

Question 11

Sales budget

Answer 11

Planned sales for a future period of time - can be in terms of volume or revenue

Question 12

Production cost budgeting

Answer 12

Planned production cost for a future period of time

Question 13

Zero based budgeting

Answer 13

Where no money is allocated for costs/spending unless it can be justified by the fund holder

Question 14

Variance analysis

Answer 14

Finding reasons for the difference between actual figure and expected financial outcome

Question 15

Favourable variance

Answer 15

Actual figures are better than predicted/budgeted figures

Question 16

Adverse variance

Answer 16

Actual figures are worse than predicted/budgeted figures

Question 17

Difficulties of budgeting

Answer 17

>figures aren’t actual figures
>if sales data is inaccurate budgets will be inexact
>setting of budgets may lead to conflict
>opportunity costs
>over ambitious will cause problems

Question 18

Gross profit

Answer 18

Revenue - cost of sales

Question 19

Operating profit

Answer 19

Gross profit - overheads (operating costs)

Question 20

Net profit

Answer 20

Operating profit - interest and exceptional costs

Question 21

Gross profit margin (GPM)

Answer 21

Gross profit / revenue * 100%

Question 22

Operating profit margin (OPM)

Answer 22

Operating profit / revenue * 100%

Question 23

Net profit margin

Answer 23

Net profit / revenue * 100%

Question 24

Ways to improve profitability

Answer 24

> raising prices
lowering costs
~buying cheaper resources
~using resources more efficiently

Question 25

Liquidity

Answer 25

Is the ease with which a assets can be converted to cash

Question 26

Assets

Answer 26

Resources that belong to a business

Question 27

Current assets

Answer 27

Are assets that will be changed to cash within 12 months

Question 28

Non current assets

Answer 28

Are long term resources that will be used repeatedly by the business over a period of time

Question 29

Liabilities

Answer 29

The debts of the business

Question 30

Current liabilities

Answer 30

Money owed that must be paid within 1 year

Question 31

Non current liabilities

Answer 31

Long term loans and any other money owed that doesn’t have to be paid back for over at least 1 year

Question 32

Capital

Answer 32

The money put into the business by owners

Question 33

Net assets

Answer 33

Total assets - total liabilities

Question 34

Shareholders equity

Answer 34

Summary of what is owed to the owners of the business

Question 35

Current ratio

Answer 35

Current assets / current liabilities

Question 36

current ratios analysis

Answer 36

1.5:1 to 2:1 is good Below 1.5:1 could be argued a business doesn’t have enough working capital. Some business can work at 1:1 that sell quickly. Operating at 2:1 may mean that have too much money tied up in stock

Question 37

Acid test ratio

Answer 37

(Current assets - inventories) / current liabilities

Question 38

Acid test ratio analysis

Answer 38

A more severe test of liquidity. 1:1 may mean their assets - stocks cannot cover liabilities. Some businesses can deal with this as they sell products quickly

Question 39

Working capital

Answer 39

Current assets - current liabilities The funds left over to meet day to day expenses after current debts have been paid

Question 40

Managing working capital | Different businesses will have different working capital needs, depending on:

Answer 40

>the size of the business >stock levels >debtors and creditors >maintaining adequate levels of working capital

Question 41

Importance of cash

Answer 41

Cash is vital to a business, without it they might fail

Question 42

Ways to improve liquidity

Answer 42

``` >only make essential purchases >sales and leasebacks >use of overdrafts >negotiate short or long term loans w bank >extend credit with suppliers ```

Question 43

Capacity utilisation

Answer 43

Is about the use that’s business makes of it resources

Question 44

Capacity utilisation formula

Answer 44

Current output/maximum possible output *100

Question 45

Under utilisation

Answer 45

The position where a business is producing at less than full capacity

Question 46

Drawbacks of under utilisation

Answer 46

>not be making the most of resources >operating inefficiently as unit costs aren’t minimised >may affect morale of workers

Question 47

Benefits of under utilisation

Answer 47

>Cope more easily with sudden rises in demand >less work related stress >reduce sickness and absenteeism

Question 48

Over utilisation

Answer 48

Where a business is operating at full capacity and draining resources

Question 49

Drawbacks of over utilisation

Answer 49

``` >strain on resources >causing stress leading to absenteeism >machines may be overused to break point >may not cope with increase in demand >insufficient time for staff training ```

Question 50

Benefits of over utilisation

Answer 50

>average costs are lower as fixed costs are spread over more units >more staff motivation as they feel secure >busy operation improves business image

Question 51

Ways of improving capacity utilisation

Answer 51

>increase usage >increase sales >outsourcing >reduce capacity