Financial terms and calculations study guide

A cost that changes in direct proportion to the level of output or activity.

The total amount of money received from sales of goods or services before any costs are deducted.

The average rate of return is the ratio of total net cash inflow from an investment to its initial cost, expressed as a percentage.

The average rate of return is the percentage of profit earned on an investment relative to the initial cost of that investment.

The level of output at which total revenue equals total costs, resulting in zero profit.

The level of sales at which total revenue equals total costs, resulting in zero profit.

The level of output at which total revenue equals total cost, resulting in zero profit.

The break-even point is the level of sales at which total revenue equals total costs, resulting in zero profit.

Exam practice

• A small manufacturer has fixed costs of £2,000 per month and a variable cost of £5 per unit. If it produces 100 units, what is its total cost for the month?
• A retailer incurs fixed costs of £3,000 per month and a variable cost of £12 per item sold. If the retailer sells 400 items in a month, calculate the total cost for that month.
• A small manufacturer sells 200 units at £15 each and incurs total costs of £2,000. What is the profit?
• A retailer has revenue of £12,500 and total costs of £9,200. Calculate the profit and state whether the business is profitable.
• Which of the following best describes the average rate of return for an investment in new machinery?
• A small manufacturer buys a new machine for £20,000. Over the next 5 years it generates net cash inflows of £5,000 each year. Calculate the average rate of return and state whether the investment is acceptable if the company requires a minimum return of 15%.
• Which of the following correctly represents the formula for calculating the average rate of return (ARR) on an investment?
• A small manufacturer invests £120,000 in new machinery. Over the next five years it earns a net profit of £30,000 each year. Calculate the average rate of return for this investment.
• Which of the following best defines break-even output?
• A small manufacturer has fixed costs of £10,000, a variable cost of £20 per unit, and sells each unit for £50. Calculate the break-even output.
• Which of the following best describes the point where the total cost line meets the total revenue line on a break-even chart?
• Analyse how an online service business could use a break-even chart to decide whether to launch a new subscription tier.
• A small manufacturer produces a single product. The break-even chart shows that the total cost curve intersects the total revenue curve at 1,200 units. Which of the following statements is true?
• A small online service business has fixed costs of £8,000 per month. The variable cost per user is £5 and the subscription price is £15. The business currently has 1,200 users. Calculate the break-even level of output and the margin of safety. Show all working.
• Which of the following best describes the main value of break-even analysis for a small online service business?
• Analyse how a break-even analysis can influence the decision of a small manufacturer to launch a new product line.