# Unit 3 formulas and key terms

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Fixed Cost
Costs that do not change with output; they have to be paid regardless of how much a business produces
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Variable Costs
Costs that do change with output; these costs are directly linked to the product or service
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Start-up cost
Costs that a business has to pay when the business sets up. For example, fixtures and fittings
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Operating Costs (running costs)
Costs that have to be paid for the day to day running of the business. For example, heat, light, rent etc…
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Total Costs
TC = FC + VC
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Revenue
This is the money that comes into the business. It is also known as turnover or revenue
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Revenue (formula)
Selling Price per unit x Quantity sold
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Net Profit
This is the amount of money that the business earns AFTER paying for all of its costs
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Net Profit (formula)
GROSS PROFIT – OPERATING EXPENSES – NET PROFIT
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Break-even
Level of output where: Total Revenue = Total Costs
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Break-even
FIXED COSTS / Contribution per unit
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Contribution per unit
Selling Price per unit – Variable costs per unit
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Total contribution
Contribution Per Unit x Number Of Units Sold
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Margin of safety
This is the difference between your break-even point and the number of units you expect to sell
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Margin of safety (formula)
Actual Sales - Breakeven point
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Cash Flow Forecasting
This is a forecast the business makes for what it expects to have coming into the business and out of the business
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Inflows
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Outflows
Money going out of the business
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Cost of sales
Costs linked directly with the production of a product
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Gross Profit
Sales - Cost of sales
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Net Profit
Gross Profit - Expenditure
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Income Statement (profit and loss) (SOCI)
A statement of income and expenditure; usually produced every 12 months
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Balance Sheets (statement of financial position)
A statement outlining the financial position of the business
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Assets
Things of value that the business owns
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Liabilities
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Sources of finance
Ways in which the business can raise money. These can be internal (from within the business) and external (outside of the business)
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Accruals
This is when an expense is paid after the period to which it relates.
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Profitability Ratios: Gross Profit Margin
(gross profit/revenue) × 100
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Profitability Ratios: Mark-up
(gross profit/cost of sales) × 100
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Profitability Ratios: Profit Margin
(profit/revenue) × 100
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Profitability Ratios: Return On Capital Employed (ROCE)
(profit/capital employed) × 100
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Measuring Liquidity: Current Ratio
current assets / current liabilities
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Measuring Liquidity: Liquid Capital Ratio
(current assets – inventory) / (current liabilities)
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Measuring Efficiency: Inventory Turnover
(average inventory/cost of sales) × 365
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Net Assets
(current assets + non-current assets) – (current liabilities + long-term liabilities)
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Net Cash Flow
Total Inflows – Total Outflows
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Depreciation (1) Straight Line
(Historic value-Scrap Value) / (Expected life)
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Depreciation (2) Straight Line
% x cost
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Depreciation (3) Reducing Balance
(% x NBV) or (Cost – depreciation to date x %).
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## Other cards in this set

### Card 2

#### Front

Costs that do change with output; these costs are directly linked to the product or service

Variable Costs

### Card 3

#### Front

Costs that a business has to pay when the business sets up. For example, fixtures and fittings

### Card 4

#### Front

Costs that have to be paid for the day to day running of the business. For example, heat, light, rent etc…

TC = FC + VC