Financial Terms & Calculations Practice Questions

Answer all parts of this question.

Item A: Fernway Totes

Shona Okoro is a sole trader who owns Fernway Totes. The business prints designs on cotton tote bags and sells them to gift shops across the north of England. Shona rents a small workshop and leases a printing machine. These costs, together with insurance, come to fixed costs of £40 000 a year. Each bag costs £4 in materials and bags are sold to the gift shops for £12 each. The workshop can produce a maximum of 10 000 bags a year.

Shona has drawn a break-even chart to help her plan for next year. Figure 1 shows the costs and revenue of Fernway Totes at different levels of output.

Figure 1: Break-even chart for Fernway Totes

Figure 1 shows a break-even chart for a small business.

Figure 1

Item A: Saffron Street Kitchen Ltd

Yasmin Akhtar is a director of Saffron Street Kitchen Ltd (SSK), a private limited company that owns two takeaway restaurants in Leeds. SSK sells pizzas, wraps and salads and employs 14 staff. Last year SSK made a net profit of £28 000.

The main pizza oven at the Headingley restaurant is nine years old. It breaks down about once a month and each breakdown means the restaurant has to stop taking pizza orders for the rest of the evening. Yasmin is considering buying a new oven at a cost of £24 000. The new oven cooks pizzas in half the time and uses less electricity, so SSK would be able to serve more customers at peak times as well as cutting its energy bill.

Item B: Saffron Street Kitchen Ltd

The new oven has an expected life of five years. Yasmin has estimated the extra profit the oven would earn in each of those years.

Table 2: Expected extra profit from the new oven

Year	Extra profit
1	£4 000
2	£6 000
3	£8 000
4	£9 000
5	£9 000

SSK has £30 000 of retained profit. If this money were left in the company's savings account it would earn a return of 6% a year. The other director, Imran, thinks the old oven should simply be repaired and the money kept in the business, because two new takeaways have opened on the same street this year.

Item A: Zendo Foods plc

Zendo Foods plc makes frozen ready meals. It began as a family business in Bristol and became a public limited company in 2016. It now supplies supermarkets in the UK, Poland and the Netherlands from a single factory in Bristol and employs 740 people. A pack of its best-selling chicken curry is sold to supermarkets for £2.40.

Zendo's gross profit margin has fallen from 34% to 29% over three years. The directors blame the rising prices of the chicken and vegetables the business buys. The cost of transporting frozen food across Europe has also risen, reducing net profit.

Zendo has £2 million available to invest and must choose between two options.

Option 1: Buy a new automated production line for the Bristol factory. The machinery would cut the cost of sales on every pack by around 8%, but 40 production jobs would be lost.

Option 2: Open a distribution centre in Poland. The forecast profits are based on a market research report published three years ago, which predicted that the Polish frozen-food market would grow by 6% a year.

Table 1 – Financial information for the two options

	Option 1: production line	Option 2: distribution centre
Cost of investment	£2 000 000	£2 000 000
Expected total profit over 5 years	£1 800 000	£2 500 000
Average rate of return		25%

Item A: Masala Kerb

Masala Kerb is a street food business in Leicester run by Anjali Shah and Sanjay Varma as a partnership. They sell boxes of curry and rice from a converted van at lunchtime on a city centre market pitch, and at music festivals at weekends. A box is priced at £7.00.

The partners buy chicken, rice and spices from a cash-and-carry three times a week, and also pay for cooking gas and takeaway boxes. The rent for the market pitch has risen from £290 to £360 a month and the price of cooking oil has increased. There are two other food vans on the same market.

Item B: Masala Kerb

Anjali and Sanjay want to increase the monthly profit of Masala Kerb. They are considering two options.

Option 1: increase the price of a box from £7.00 to £8.00

Option 2: reduce the variable cost of a box from £2.80 to £2.20 by placing one large order each week with a wholesaler, which would mean buying a second freezer

Table 1: Current monthly figures for Masala Kerb

Item	Amount
Selling price per box	£7.00
Variable cost per box	£2.80
Fixed costs per month	£4 200
Boxes sold per month	1 400

Item A: Bright Spark Candles

Bright Spark Candles is a small business based in Kendal. The owner, Amira Patel, is a sole trader. She hand-pours soy wax candles into recycled glass jars and sells them for £12.00 each at farmers' markets in Cumbria and through her own website. Amira set the business up in 2020 using £3 000 of her personal savings.

Each candle is made from soy wax, a cotton wick, fragrance oil and a glass jar. Amira buys her jars from a wholesaler in Birmingham, who charges £1.80 for each jar. She rents a small workshop and also pays insurance, website costs and market stall fees each month.

Sales are highest between October and December. A wholesaler in Manchester has offered to supply similar glass jars for £1.35 each. However, Amira would have to order at least 500 jars at a time and the jars would be delivered in plain boxes rather than in protective packaging. Amira is deciding whether to buy her jars from the Manchester wholesaler.

Table 1: Financial information for October

Item	October
Selling price for each candle	£12.00
Variable cost for each candle	£4.60
Fixed costs	£1 450
Candles sold	900