Financial Terms & Calculations Flashcards
All 28 cards in this deck
What is a fixed cost?
A cost that does not change as the level of output changes.
e.g. rent, interest payments, insuranceWhat is a variable cost?
A cost that changes directly with the level of output.
e.g. raw materials, packagingWhat is the formula for total revenue?
Total revenue = selling price × quantity sold
What is the formula for profit?
Profit = total revenue − total costs
A loss is made when total costs are greater than total revenue.What are the steps to calculate total costs?
e.g. fixed costs £500, variable cost £2 per unit, 100 units made- Variable costs = variable cost per unit × output: £2 × 100 = £200
- Total costs = fixed costs + variable costs: £500 + £200 = £700
What are the steps to calculate a selling price per unit from costs and a profit target?
e.g. total cost per unit £9, target of 200% profit on top of costs- Find the total cost per unit: £9
- Profit required = 200% of £9 = £18
- Selling price = cost + profit = £9 + £18 = £27
What are the steps to calculate a percentage change?
e.g. revenue falls from £120 000 to £90 000- Change = new − original: £90 000 − £120 000 = −£30 000
- Divide by the original value: £30 000 ÷ £120 000 = 0.25
- Multiply by 100: a 25% fall
State one reason a business might invest in new machinery.
To increase output/productivity (or to improve the quality of the product).
State one reason a business might invest in new buildings.
To increase capacity — e.g. a bigger factory, extra shop or new warehouse allows more output or sales.
State one reason a business might invest in new vehicles.
To deliver goods to customers more quickly and reliably (and to cut maintenance/fuel costs of old vehicles).
What is the formula for the average rate of return (ARR)?
ARR = (average profit per year ÷ cost of investment) × 100
What are the steps to calculate the average rate of return?
e.g. an investment of £36 000 gives total profit of £45 000 over 5 years- Average profit per year = total profit ÷ number of years: £45 000 ÷ 5 = £9 000
- Divide by the cost of the investment: £9 000 ÷ £36 000 = 0.25
- Multiply by 100: ARR = 25%
When comparing two investment projects, which average rate of return figure is better?
The higher ARR — it gives a greater percentage return per year on the money invested.
What is break-even output?
The level of output at which total revenue equals total costs, so the business makes neither a profit nor a loss.
What is the margin of safety, and how is it found?
The amount by which output can fall before a loss is made: margin of safety = planned (or actual) output − break-even output.
On a break-even chart, what does the fixed cost line look like?
A horizontal straight line — fixed costs stay the same at every level of output.
On a break-even chart, which area shows profit?
The area to the right of the break-even point, where the total revenue line is above the total cost line.
True or false? On a break-even chart the total revenue line starts at the same point as fixed costs.
False. The total revenue line starts at zero (no output means no revenue); it is the total cost line that starts at the fixed cost level.
What happens to break-even output if fixed costs increase?
Break-even output rises — more units must be sold to cover the higher costs.
What happens to break-even output if the selling price is increased and costs stay the same?
Break-even output falls — each unit sold contributes more towards covering fixed costs.
What happens to break-even output if the variable cost per unit rises?
Break-even output rises — each unit contributes less towards fixed costs, so more must be sold.
State one benefit to a business of using break-even analysis.
It shows how many units must be sold to cover costs, so output and sales targets can be set.
State one limitation of using break-even analysis.
It assumes price and costs stay constant and that everything produced is sold, which is often unrealistic.
True or false? A business with a large margin of safety is less at risk of making a loss if sales fall.
True. Output can fall a long way before it drops to the break-even level.
True or false? Revenue and profit mean the same thing.
False. Revenue is the total income from sales; profit is revenue minus total costs.
True or false? At the break-even level of output a business makes a small profit.
False. At break-even total revenue exactly equals total costs, so there is neither profit nor loss.
What are the steps to identify the break-even level of output from a break-even chart?
e.g. the total revenue and total cost lines cross above 400 on the output axis
- Find where the total revenue line crosses the total cost line → the crossing point.
- Read straight down from that point to the output axis → 400.
- State it as the break-even output → 400 units.
True or false? On a break-even chart, the break-even output is read off the vertical axis.
False. It is read off the horizontal (output) axis, below the point where the total revenue and total cost lines cross.