Unit 6.3 - Financial terms and calculations

Question 1

business investments (6)

Answer 1

New machinery
New buildings
New vehicles
New products
Training 
New workers

Question 2

Average Rate of Return (ARR) formula (2)

Answer 2

Step 1: average yearly profit = profit/number of years

Step 2: ARR = average yearly profit/cost of investment *100

Question 3

Break even formula (2)

Answer 3

Step 1: contribution = selling price - variable costs

Step 2: break even = fixed costs/contribution (SP-VC)

Question 4

Calculating margin of safety

Answer 4

Margin of safety = current level of output (actual output) - break even output

Question 5

Advantages of break even (5)

Answer 5

Easy to work out
Quick
Predict how changes may affect the business
Help get financial help (such as a loan)
May stop businesses selling products that may be hard to sell in large quantities

Question 6

Disadvantages of break even? (5)

Answer 6

Assumes firm can sell any quantity of the product at the current price
Assumes all products are sold (no waste)
Data is wrong (results are wrong)
Complicated if more than one product
Shows how much needed to sell, not how much they will sell