Edexcel Business - Paper 2 Summer
SOLUTIONS GRADE A+ ACCREDITED
Break-even analysis
- A method of determining what sales volume must be reached before
total revenue equals total cost
Break-even formula
break-even = total fixed costs / contribution per unit
Contribution per unit formula
contribution = selling price - variable cost
Break-even analysis pros and cons
Pros:
- Useful for management, predicts break-even output, margin of safety, and estimate
profits at different levels
- Highlights the importance of fixed costs, lower fixed costs = lower break-even
output
- Data generated can be used in the business plan
Cons:
- Based on predicted data not actual data
- Many unrealistic assumptions such as the same price always being used, no waste or
all units produced are sold
Break-even charts
- Graphs which show how costs and revenues of a business change with
sales, show sales needed to break-even
Margin of safety
- How far demand will fall before the business slips into a loss-
making position
Budgets
- A target for revenue or costs for a future time period
- How most medium-large businesses manage their finance
- Both income and expenditure budgets
Budgets pros and cons
Pros:
, - Expenditure budgets allow for spending power to be delegated to local managers
- Can help motivate staff, try hit targets
Cons:
- Can be hard to ensure they are set realistically
- Imposing budgets on staff is demotivating for the workforce, it has to be agreed
Historical budgets
- Using last years budget as a guide and then making adjustments
based on changes of the circumstances for the department
Zero-based budgets
- Involves setting each budget to zero each year
- Each budget holder is expected to justify a budget each year that
they can work to for the coming year
- Very time consuming
Variance analysis
- Involves looking back to calculate the difference between a
budgeted figure and the actual figure that occurred
- Adverse is given when data is lower than expected
- Favourable is given when data is better than expected
Gross profit formula
gross profit = revenue - direct costs
Operating profit formula
operating profit = gross profit - indirect costs
Net profit formula
net profit = operating profit - interest and tax
Gross profit margin (GPM) formula
GPM = (gross profit / revenue) x 100
Operating profit margin (OPM) formula
OPM = (operating profit / revenue) x 100
Net profit margin (NPM) formula
NPM = (net profit / revenue) x 100
Ways to improve profitability
- Increase selling price
- Cut costs
Difference between cash and profit
- Sales revenue does not equal cash inflows e.g. bank loan, capital
raised from shares are inflows but not revenue
- Costs do not equal cash outflows e.g. trade credit, receiving a
good but not paying the supplier for 60 days
Liquidity
SOLUTIONS GRADE A+ ACCREDITED
Break-even analysis
- A method of determining what sales volume must be reached before
total revenue equals total cost
Break-even formula
break-even = total fixed costs / contribution per unit
Contribution per unit formula
contribution = selling price - variable cost
Break-even analysis pros and cons
Pros:
- Useful for management, predicts break-even output, margin of safety, and estimate
profits at different levels
- Highlights the importance of fixed costs, lower fixed costs = lower break-even
output
- Data generated can be used in the business plan
Cons:
- Based on predicted data not actual data
- Many unrealistic assumptions such as the same price always being used, no waste or
all units produced are sold
Break-even charts
- Graphs which show how costs and revenues of a business change with
sales, show sales needed to break-even
Margin of safety
- How far demand will fall before the business slips into a loss-
making position
Budgets
- A target for revenue or costs for a future time period
- How most medium-large businesses manage their finance
- Both income and expenditure budgets
Budgets pros and cons
Pros:
, - Expenditure budgets allow for spending power to be delegated to local managers
- Can help motivate staff, try hit targets
Cons:
- Can be hard to ensure they are set realistically
- Imposing budgets on staff is demotivating for the workforce, it has to be agreed
Historical budgets
- Using last years budget as a guide and then making adjustments
based on changes of the circumstances for the department
Zero-based budgets
- Involves setting each budget to zero each year
- Each budget holder is expected to justify a budget each year that
they can work to for the coming year
- Very time consuming
Variance analysis
- Involves looking back to calculate the difference between a
budgeted figure and the actual figure that occurred
- Adverse is given when data is lower than expected
- Favourable is given when data is better than expected
Gross profit formula
gross profit = revenue - direct costs
Operating profit formula
operating profit = gross profit - indirect costs
Net profit formula
net profit = operating profit - interest and tax
Gross profit margin (GPM) formula
GPM = (gross profit / revenue) x 100
Operating profit margin (OPM) formula
OPM = (operating profit / revenue) x 100
Net profit margin (NPM) formula
NPM = (net profit / revenue) x 100
Ways to improve profitability
- Increase selling price
- Cut costs
Difference between cash and profit
- Sales revenue does not equal cash inflows e.g. bank loan, capital
raised from shares are inflows but not revenue
- Costs do not equal cash outflows e.g. trade credit, receiving a
good but not paying the supplier for 60 days
Liquidity
