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