Here is a list of routinely forgotten equations for Business Studies, make sure to memorise them.
Equations
Total Contribution =
Total revenue - Total variable cost
Contribution per unit =
Selling price per unit - Variable cost per unit
or (for total contribution)
Contribution per unit x Number of units sold
Profit =
Total contribution - Fixed cost
Break-even Output =
Fixed cost / Contribution per unit
What do they mean?
- Contribution is useful for a business to be responsible for a range of products, it allows them to calculate how much money they make on a sale.
- The Break-even charts (and equation) is a tool that allows you to show total costs at all possible levels of output or demand from zero to maximum capacity. Break-even is not given in money, and should be the amount of units sold.
- Profit is money made, not taking anything into account other than fixed and variable cost.
- Contribution per unit, is just total contribution per unit. So to get it, divide by the amount you sell of a product (or use the other formula). Don’t confuse this with break-even.
When calculating using these equations it is important to consider external factors. Such as extrapolation or economic variables that could be changing the data. However you may not get questions like this in the exam.
Sometimes four mark questions may ask about productivity. For example, these questions do not want you to describe the formula, they may want you to state it. But make sure to stick to the ‘because, leading to, therefore and such as’ structure. Otherwise you may not be answering the question correctly.
Break-even output is easier to consider it as the fixed costs divided by the contribution per unit, like so. If it costs $500 in rent, and you get $1 for every candy bar you sell, you need to sell 500 candy bars. Because $500 / $1 is 500 not $500.
Remember that break-even output is never given as money. Remember also to consider confidence intervals may mean that the data given is not accurate, as well as the accuracy of the data you have received.
Remember that the information you have may be hear-say and not 100% accurate, things may change. The variable cost of items may raise, or lower. Total contribution may not be accurate if the business sells multiple products at different prices. Make sure to base your equations off all of the information available, don’t take short-cuts.
"Revenue is vanity, Profit is sanity, Cash is King!"
Remember, its not percentages or ratios that businesses put in the bank, it’s dollars. credit. So think about how valuable the data you have actually is. Make sure you understand the numbers! cash flow shortages can be negated with better trade terms. Having predictable cash flow is preferable, so make sure that you mention it.