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Flashcards in The data tool box Deck (4)
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1
Q

Identify trends

A

Look at the information given. A simple comparison of changes over time of turnover, costs and profit can be a good starting point

Gross profit margin
Net profit margin

Differences between gross and net profit are often caused by changes in overheads

Check for:

  • changes in methods of accounting for overheads
  • disproportionate changes in overhead costs
2
Q

Analysing investment decisions

A

If a new investment is proposed consider how it will be funded in which case gearing and liquidity ratios may be useful.

A key issue will also be the return generated by the investment and ROCE and payback periods can help here.

ROCE: PBIT/TALCL

Payback period: The time taken for the net return to exceed the cost of the investment. Discounted payback can be used to take into account the time value of money.

3
Q

Appraising a product line

A

Consider whether a product is covering its costs and assessing the sensitivity of a business to change:

Breakeven point (units) = fixed costs/contribution per unit

Breakeven revenue = breakeven units x sales revenue

Margin of safety (units) = budgeted volume - BEP

Margin of safety (% budget) =( budgeted volume - BEP) / budget volume

4
Q

Probability and expected values

A

The examiner may give you details of the probability of certain outcomes for example a probability of a particular level of revenue

eg
The probability of getting £100 is 40%
The probability of getting £150 is 60%

The expected value is
£100x40%       40
£150*60%        90
                       ------
                        130

over the long run the organisation will expect to receive on average revenue of £130 however in practice it is unlikely there will ever be revenue of £130.

When we are making a decision be wary of negative outcomes. Whilst the expected value may be positive the potential downside may be too great a risk.