Themes 2 AND 3 Flashcards
What is the formula for break even & contribution
Break even= Fixed costs / contribution per unit
Contribution= Selling price - Variable cost per unit
Uses of break even analysis
- Shows whether or not a business idea is viable and profitable
- Identify level of output and sales neccesary to make a profit
- Assess changes in level of production
Limitations to break even
- Unrealistic assumptions- products not sold at same price
- Sales less likely to be the same as output
- Variable costs fluctuate.
Formula for total contribution
Total output x contribution per unit
Strengths of break even analysis
- Shows business what output is needed to make a profit
- Helps entrepreneur understand level of risk involved when starting the business
- Calculations are quick and easy
- Ensures the business whether or not they are going to need loans or potential investors.
what is contribution?
what a business needs to achieve from selling its products in order to cover its fixed costs so they can start to make a profit.
What would happen to variable costs if business decided to use a cheaper supplier?
VC would decrease lowering b/e point as it would lower the total costs
what would happen to an increase in rent for a building for a mcdonalds restraunt, how would this affect mcdonalds.
Increase in rent leads to higher variable costs increasing the total costs for the business making the b/e point higher
What is the margin of safety
This is the difference between the b/e point and the current level of output
Formula for profit
margin of safety X contribution per unit
formula for margin of safety
Current level of output - Break/even point
what is investment appraisal
the process of analysing whether investement projects are worthwhile.
What is payback
method used to calculate length of time for an investment to recoup its original cost
Why is payback useful for firms
Useful for firms who need quick return and may be facing liquidity issues
How to calculate payback if it falls between two years
Amount remaining to recover / Amount recovered following year X100
What is Average rate of return (ARR)
measures profit from an investment over time
One negative to ARR
Profits may fluctuate over time and ARR does not take this into account
Formular for ARR
Average anual profit / Asset’s initial cost X100
Three steps to calculating ARR
- Total income from investment - Cost of investment = total profit of investment
- Total profit from investment / expected lifespan of asset = Average anual profit
- Average anual profit / cost of investment X100 = ARR
What is net present value
the difference between the present value of cash inflows and the present value of cash flows over a period of time.
formula for net present value
Net cash flow X discounted factor
What is gearing ratio
Gearing analyses how a business has raised its long term finance. the ratio shows how much of a firms equity that is borrowed
Formula for gearing ratio
Non current liabilities / total equity+Non current liabilities X100
factors affecting demand in a market
- Advertising and branding
- Ethical issues
- Changes in income
- Changes in price of complementary goods
Factors affecting supply
- number of suppliers
- demand for product
- cost of production
external factors:
-covid
-war
-trends
What is formula for return on capital employed (ROCE)
OPERATING PROFIT / CAPITAL EMPLOYED X 100
What is roce
Roce is a ratio that compares operating profit and capital employed. Capital employed is the total equity plus non current liabilities
How to work out capital employed
Total equity + Capital employed
