Edexcel A Level Business Paper 2 -
Calculations Exam Elaboration Q&A
Core Costing and Investment Appraisal
1. How do you calculate the Average Cost Per Unit?
Answer: The Average Cost Per Unit is calculated by dividing the Total
Production Costs by the Total Output (in Units).
Average Cost Per Unit=Total Output (Units)Total Production Costs
2. Explain how to determine the Net Present Value (NPV) of a project.
Answer: The Net Present Value (NPV) is calculated by multiplying each Cash
Flow by its corresponding Discount Factor (which is based on a predicted rate,
often inflation or a required rate of return) and then summing these discounted cash
flows. The initial investment is then subtracted from this total.
NPV=∑(1+r)tCash Flowt−Initial Investment
Where:
t = Time period
r = Discount rate
3. What is the formula for calculating the Average Rate of Return (ARR)?
Answer: The Average Rate of Return (ARR) is calculated by dividing the Net
Return (Total Profit over the project's lifespan divided by the number of
years) by the Capital Outlay Cost (initial investment) and then multiplying by
100 to express it as a percentage.
ARR=Initial InvestmentAverage Annual Profit×100
4. Describe how to calculate the Payback Period.
Answer: The Payback Period is the length of time it takes for the cumulative cash
inflows from a project to equal the initial investment. It's calculated by dividing the
, Costs of the Project (Initial Investment) by the Net Cash Flow Generated per
period. If the cash flows are not even, you'll need to calculate cumulatively until
the initial investment is recovered. For periods shorter than a year, you can
multiply the remaining cost by 12 and divide by the monthly cash flow (as shown
in the original formula, assuming annual cash flow).
Payback Period (in years)=Annual Net Cash FlowInitial Investment
Payback Period (with monthly conversion)=Monthly Net Cash FlowRemaining Co
st to Recover
5. What is the formula for calculating Revenue?
Answer: Revenue is calculated by multiplying the Selling Price per unit by the
Number of Units Sold.
Revenue=Selling Price×Units Sold
6. How do you calculate Gross Profit?
Answer: Gross Profit is calculated by subtracting the Cost of Sales from the
Revenue.
Gross Profit=Revenue−Cost of Sales
7. Explain how to determine Operating Profit.
Answer: Operating Profit is calculated by subtracting Operating Expenditure
(which includes costs like administration, marketing, and distribution) from the
Gross Profit.
Operating Profit=Gross Profit−Operating Expenditure
8. What is the formula for Profit After Tax?
Answer: Profit After Tax is calculated by subtracting Financial Costs (like
interest payments) and Taxes from the Operating Profit.
Profit After Tax=Operating Profit−Financial Costs−Taxes
Financial Ratios
Calculations Exam Elaboration Q&A
Core Costing and Investment Appraisal
1. How do you calculate the Average Cost Per Unit?
Answer: The Average Cost Per Unit is calculated by dividing the Total
Production Costs by the Total Output (in Units).
Average Cost Per Unit=Total Output (Units)Total Production Costs
2. Explain how to determine the Net Present Value (NPV) of a project.
Answer: The Net Present Value (NPV) is calculated by multiplying each Cash
Flow by its corresponding Discount Factor (which is based on a predicted rate,
often inflation or a required rate of return) and then summing these discounted cash
flows. The initial investment is then subtracted from this total.
NPV=∑(1+r)tCash Flowt−Initial Investment
Where:
t = Time period
r = Discount rate
3. What is the formula for calculating the Average Rate of Return (ARR)?
Answer: The Average Rate of Return (ARR) is calculated by dividing the Net
Return (Total Profit over the project's lifespan divided by the number of
years) by the Capital Outlay Cost (initial investment) and then multiplying by
100 to express it as a percentage.
ARR=Initial InvestmentAverage Annual Profit×100
4. Describe how to calculate the Payback Period.
Answer: The Payback Period is the length of time it takes for the cumulative cash
inflows from a project to equal the initial investment. It's calculated by dividing the
, Costs of the Project (Initial Investment) by the Net Cash Flow Generated per
period. If the cash flows are not even, you'll need to calculate cumulatively until
the initial investment is recovered. For periods shorter than a year, you can
multiply the remaining cost by 12 and divide by the monthly cash flow (as shown
in the original formula, assuming annual cash flow).
Payback Period (in years)=Annual Net Cash FlowInitial Investment
Payback Period (with monthly conversion)=Monthly Net Cash FlowRemaining Co
st to Recover
5. What is the formula for calculating Revenue?
Answer: Revenue is calculated by multiplying the Selling Price per unit by the
Number of Units Sold.
Revenue=Selling Price×Units Sold
6. How do you calculate Gross Profit?
Answer: Gross Profit is calculated by subtracting the Cost of Sales from the
Revenue.
Gross Profit=Revenue−Cost of Sales
7. Explain how to determine Operating Profit.
Answer: Operating Profit is calculated by subtracting Operating Expenditure
(which includes costs like administration, marketing, and distribution) from the
Gross Profit.
Operating Profit=Gross Profit−Operating Expenditure
8. What is the formula for Profit After Tax?
Answer: Profit After Tax is calculated by subtracting Financial Costs (like
interest payments) and Taxes from the Operating Profit.
Profit After Tax=Operating Profit−Financial Costs−Taxes
Financial Ratios
