IB BM Unit 3 Finance

Break-even revenue

(Fixed costs / contribution per unit) * Price per unit

Share capital (3.1)

(also known as "equity capital"): Money raised from the sale of shares of a limited company and is also know as equity capital; public limited companies sell their shares on the stock exchange. Money raised from the sale o shares o a limited company. A form of long-term finance. Advantages: 1. A permanent source of capital that will not need to be repaid. 2. There is no interest payments and this relieves the business from additional expenses. Disadvantages: 1. Shareholders expect to be paid dividends when a business makes a profit. 2. For public limited companies the ownership of the company may be diluted or change hands from the original shareholders to new investors or shareholders via the stock exchange. Authorized share capital suggests the maximum amount the shareholders of a company intent to raise. Defined as: the funds raised by issuing shares and is based on the value of the shares when they were first sold.

Benefits of using several profit centers

1. A clearer comparison between activities and teams regarding performance and efficiency can be made. 2. A better and more focused decision-making process will result in a better allocation of resources to each profit center/individual model. 3. the empowerment, trust, responsibility, and accountability is given to the teams in each cost center of the three different teams are likely to result in improved motivation and therefore, efficiency.

Benefits of Break-Even Analysis

1. Charts are relatively easy to construct and interpret. 2. It provides useful guidelines to management on break-even points, safety margins and profit/loss levels at different rates of output. 3. Comparisons can be made between different options by constructing new charts to show changed circumstances. 4. The equation produces a precise break-even result. 5. Break-even analysis can be used to assist managers when taking important decisions, such as location decisions, whether to buy new equipment and which project to invest in.

Factors to consider when choosing a source of finance

1. Duration (short-, medium-, or long-term) 2. Source (internal or external) 3. Amount required 4. Level of flexibility 5. Purpose

Strategies to deal with cash flow problems

1. Reducing cash outflows (for example delaying the purchase of some fixed assets, delaying payments of suppliers or sourcing cheaper suppliers) 2. Improving cash inflows (for example allowing delayed payment on credit) 3. Looking for additional finance (for example selling some assets and leasing them back)

Advantages of partnerships

1. Shared responsibilities 2. Shared expertise and knowledge 3. Shared risk 4. Shared finance

Limitations of Break-Even Analysis

1. The assumption that all costs and revenues are represented by straight lines in unrealistic. 2. Not all costs can be conveniently classified into fixed and variable costs. The introduction of semi-variable costs will make the technique more complicated. 3. There is no allowance made for stock levels on the break-even chart. It is assumed that all units produced are sold. This is unlikely to always be the case in practice. 4. It is also unlikely that fixed costs will remain unchanged at different output levels up to a maximum capacity.

Role of cost and profit centres

1. They provide information that can aid decision-making. 2. They can improve accountability 3. They help track problem areas and benchmarking Comparisons between centers could lead to conflicts or staff stress, as the pressure of managing a budget may be high for some staff.

Reasons for depreciation

1. Wear and tear (for example for vehicles or machinery, as their repeated use means that their value decreases and more money is needed to replace them. 2. Obsolescence (for example computer hardware and software that fall in value as new or improved values are introdued in the market.

Target output profit

= (fixed costs + target profit)/ contribution per unit

Calculating break-even quantity

= Fixed costs / contribution per unit. OR total costs = total revenue Can be calculated by dividing the total fixed costs by the contribution per unit.

Gross Profit Margin

= Gross Profit/Sales revenue * 100 Can be improved by for example increasing prices (to increase salles revenue) or trying to fins a cheaper supplier ( to decrease the costs of goods aold.

Net profit margin

= net profit before interest and tax/sales revenue * 100 Can be improved if a business tries to reduce expenses (such as overheads)

Cost of sales

= opening stick + purchases - closing stock

Gross profit

= sales revenue - cost of sales

Total costs (3.2)

= total of fixed costs (TFC) + total of variable costs (TVC). Is the summation of all fixed and variable costs

Total contribution (3.3)

= total revenue - total variable costs. The difference between the total sales revenue and the total variable costs. Can also be calculated as = contribution per unit * number of units sold.

Sole trader

A business in which one person provides the permanent finance and, in return, has full control of the business and is able to keep all of the profits. Characteristics: 1. Unlimited liability - a firm's finances are not separate from the owner's. 2. Owned by one person but may have a number of employees 3. Limited capital for expansion.

Ratio Analysis (3.5)

A financial analysis tool that assesses a firm's financial statements and aids its decision making by making meaningful historical and inter-firm comparisons through analysing past ratios and ratios of other businesses in the same or different industries.

Sale of assets (3.1)

A form of an internal source of finance. When the business sells unwanted or unused assets (for example obsolete machinery or vehicles) to raise funds. Advantages: 1. A good way of raising cash from capital that may be tied up in assets that are not being used. 2. No borrowing costs are incurred. Disadvantages: 1. May only be an option available to established businesses and not new ones that may lack excess assets to sell. It may adopt a sale and leaseback option, which involves selling an asset that the business still needs to use.

Subsidies (3.1)

A form of financial assistance, often from the government or non-governmental organizations (NGOs): they sometimes take the form of subventions and, like grants, do not have to be repaid. Financial assistance granted by a government, a non-governmental organization (NGO), or an individual to support business enterprises that are in the public interest. Advantages: 1. Is that granting subsidies is that it helps businesses to increase their demand for goods by charging lower prices for their products. 2. Subsides do not have to be repaid. The disadvantage is that they are often marred by political interference in the subsidization process.

Net present value (NPV) (3.8)

A form of investment appraisal. The difference in the summation of present values of future returns and the original cost of investment. The summation of present values of future cash inflows (returns), calculated using "discount factors" ("discount rates") provided in a "discount table" (in order to convert future cash flows into their present value. It makes use of the discounted cash flow method in its calculation. It includes all cash flows in its computation as well as the opportunity cost and time value o money. However, it is more complex to calculate and can only be used to compare investment projects with the same initial cost outlay. Advantages include the fact that it takes opportunity cost and the time value of money into the account. Disadvantages include that it is based on a discount rate that may not be well predicted. It is also more complicated to calculate than the payback period or ARR. It can only be used to compare investment projects with the same initial cost outlay.

Break-even chart (3.3)

A graphical method that measures the value of a firm's costs and revenues against a given level of output. Is a graphical method that measures the value of a firm's costs and revenues against a given level of output and helps in identifying the break-even point.

Revenue (3.2)

A measure of the money generated from the sale of goods and services.

Sales Forecasting

A quantitative technique that attempts to estimate the level of sales a business expects to achieve, over a given time period. Limitation: 1. May be difficult to determine the future trends based on past success. 2. The sales forecasting model does not explain data, it only describes what happens. 3. Qualitative factors cannot be incorporated even though they might be very significant

Insolvency (3.7)

A situation where a business runs out of cash but may still be profitable

Liquidation (3.7)

A situation where all a firm's assets are sold of to pay any funds owing

Dividends

A sum of money paid to shareholders decided by the board of directors of a company

Payback period (3.8)

A type of investment appraisal. Refers to the length of time required for an investment project to pay back its initial cost outlay. The length of time required for an investment project to pay back its initial cost outlay. Looks at how long a business will take to recover its principal investment or initial cash outlay from its net cash flows. It is simple to calculate and a useful method in rapidly changing industries. However, it does not consider the cash earned after the payback period and ignores the overall profitability o an investment project. Advantages include the fact that is simple and fast to calculate. Business managers can also easily comprehend and use the results obtained. It also helps firms with cash-flow problems because they can choose the investment projects that can pay back more quickly than others. Disadvantages are that it ignores the overall profitability of investment beyond payback. it also ignores the cash earned after the payback period which could influence major investment decisions.

Annotate (AO4)

Add brief notes to a diagram or graph

Label (AO4)

Add labels to a diagram

Complete (AO4)

Add missing information/data

Average rate of return (ARR) (3.8)

Also called the "accounting rate of return," and measures the annual net return of an investment, as a percentage of its capital cost. Measures the annual net return on investment as a percentage of its capital cost. Assesses the profitability per annum generated by a project over a period o time and is also known as accounting rate of return. The ARR can also be compared to the interest that banks apply to loanes to assecess the level of risk. It makes use o all the cash flows in a business and shows the profitability of an investment project over a given period o time. However, it does not consider the timing o cash inflows and effects on the time value o money. A form of investment appraisal. Advantages include the fact that it shows the profitability of an investment project over a given period of time, allowing comparisons with other investment projects. Disadvantages are that it does not consider the timing of cash inflows. It does not consider a longer time period or useful life of the project, there are likely to be forecasting errors. Long-term forecasts decrease the accuracy of results. Also, the effect on the time value of money is not considered.

Fixed assets

Are assets that are likely to be held by an organization for at least one year and can not be easily converted into cash. Long-term assets that are relatively permanent such as land, buildings, or equipment. Examples include land, buildings, machinery, and vehicles.

Cost centre (3.9)

Are sections of a business hwere costs are incurred and recorded. A section of a business where costs are incurred and recorded. Are sections o a business where costs are incurred and recorded and help to collect and effectively use cost data, while profit centers are sections o a business where both costs and revenues are identified and recorded, which allow businesses to calculate how much profit each center makes. For example by item (wavges, electricity, insurance), by department (marketing, production), by project, or by-product.

Proft centre (3.9)

Are the sections of a business where both costs and revenues are incurred and recorded, usually by product line, or product. A section of a business where both costs and revenues are identified and recorded. Centers are important in aiding decision making, improving accountability, tracking problem areas, increasing motivation, and benchmarking. However, some challenges faced include difficulties in allocating indirect costs to particular cost centers and external factors beyond the firm's control.

Liabilitites

Are what the company owes: long-term liabilities (such as a bank loan) and current liabilities (short-term debts to be paid within a year, money owed to creditors, tax payable to the government)

Assets

Are what the company owns: fixed assets (long-term, such as buildings or vehicles) and current assets (lasting less than a year: stock/inventroy, current cash, and money owed by debtors)

Benefits and limitations of reducing balance method

BENEFITS: 1. Reduces tax obligation 2. Useful when an asset has higher utility in the start of its life. 3. it will better reflect an assets' productivity, functionaly, and capacity to generate revenue. LIMITATIONS: 1. Difficult to determine approprate rate of depreciation. 2. Value of the asset cannot be brought down to zero 3. Results in lower net income during the inital years of an asset as depreciation is initially higher.

Benefits and limitations of straight-line depreciation

BENEFITS: 1. Simplicity 2. Assets can be written off completely 3. Total depreciation charge is known. 4. Suitable for small businesses. 5. Useful for assets of lesser value. LIMITATIONS: 1. pressure on final years 2. Does not have the provision of a replacement. 3. Interest loss. 4. Not related to the usage factor 5. Ignores that in the later years of the life of the asset, efficient the asset declines.

Why employees are interested in financial statements?

Because a profitable business means that their job is secure, or that they get a pay raise. A profitable business could signal to employees that their jobs are secure, and may indicate chances of ay raises.

Why managers are interested in financial statements?

Because final accounts help them monitor performance, comparing the results to previous years, and set budgets and strategies. Use final accounts to judge and compare their performance within a particular financial year or number of years. These will help them in setting budgets, which will then help in monitoring and controlling expenditure patterns in various departments.

Why shareholders are interested in financial statements?

Because the dividends they receive are calculated from the profit loss account. Want to know how valuable the business is becoming thought its financial year. They check on the efficiency of the business in investing capital in other to make a worthwhile return on their investment. The performance of the directors is also of interest to them: they want to see whether they need to be motivated further or replaced.

Why is the government interested in financial statements?

Because the profit and loss account helps to calculate the taxes that the business will have to pay.

Why potential investors and financers are interested in financial statements?

Because they will want to know about the creditworthiness and financial health of the business to decide how much they can invest in it.

Analyze (AO2)

Break down in order to bring out the essential elements or structure

Strategic planning (3.9)

Budgets and variance analysis play several roles in strategic planning. An organization's systematic process of defining its future direction and deciding on how to allocate its resources accordingly to fulfill this vision. They help to control revenue and expenditure, setting targets in line with the organization's strategic objectives. However, they also have limitations, as setting budgets without involving some people could result in their resentment and affect their motivation levels.

Why is the competition interested in financial statements?

Businesses will want to compare their financial statements with those of other firms to see how well they are performing financially.

Why are the suppliers interested in financial statements?

Can use final accouts to negotiate better cahs or credit terms with firms. They can either extend the trade credit period or demand immediate cash payments. The security of the business and thus its ability to pay off its debts will be a key concern for suppliers.

Cash inflows (3.7)

Cash inflows include; cash sales from selling goods or business assets, payments from debtors, and borrowing from banks.

Cash outflow (3.7)

Examples include; purchasing materials or fixed assets for cash, cash expenses such as rent, wages and salaries, and dividend payments to shareholders. Some strategies to reduce this include; negotiating with creditors to reduce payment and delaying to purchase of fixed assets, while some strategies to improve cash inflow include; insisting on cash purchases and offering incentives to encourage debtors to pay early.

Balance Sheet Order

FFAN CCDST COCST NTL NFSRE

Fixed interest rate VS: variable interest rate

Fixed interest rates: do not fluctuate and remains fixed for the entire term of the loan repayment. Variable interest rates: changes periodically based on the prevailing market conditions.

Comment (AO3)

Give a judgment based on a given statement or result of a calculation.

Available revenue streams to businesses (3.2)

Include rental income, sale o fixed assets, dividends, interests on deposits, donations, grants, and subsidies.

Increase in variable costs

Increases in variable costs increase the gradient of the total cost line. This is shown by the shift of the total cost line from TC1 to TC2. This leads to a rise in the break-even quantity and reduces the margin of safety.

Evaluate the marketing manager's proposal to increase the price of Arica Sports Kits to retailers by 15%

Increasing the price of Arica Sportswear plc (ASP) by 15% would lead to a new price of (120 * 1.15 = $138) per kit without increasing any costs this would therefore lead to ASP gaining a contribution per kite of (138 - 60 = 78). Consequently, this could lead to a lower break-even quantity of (720000/78 = 9230.8 = 9231 kites) which would help to alleviate some of the pressure on the sales representatives. However, if ASP still manages to operate at full capacity they would make a profit of ((16000*78) - 720000 = $528000) which is $288000 more than their previous profit at maximum capacity utilization in their new factory. Being a well-known brand, ASP would likely be able to increase their price by 15% since they do have a target market of loyal customers. They have previously charged a premium price so it is likely that the ASP will still be able to market their product well and emphasize its high quality. Given that there is not a reduction in the quality since ASP changed to a cheaper manufacturer, which could cause dissatisfaction with customers. ASP could even increase their sales representatives (SR) commission since they are making a higher overall profit at all levels of output with their increased price. The SR's have already begun to complain so a higher commission could motivate their sellers and they could be more successful at selling the product at a higher price. However, ASP's target market is between 12 to 24 and they may disposable incomes and struggle to pay a higher price for ASP's kites. Finally, ASP is already working at full capacity and if sellers are more motivated and selling more they may run into issues and not be able to provide the desired quantities by customers and hence disappoint them. The customers may even turn to ASP's competitors for a similar product, so ASP may want to consider further expansion or outsourcing to ease some of the pressure on the production. Ultimately ASP should try to test the market to get an idea of whether their customers would be able to purchase the kites at a higher price and whether they would be dissatisfied.

Variance analysis (3.9)

Is a budgetary control process of assessing the differences between the budgeted amount and the actual amount. If the difference between the budgeted figure and the actual figure is beneficial to the firm it is known as a favorable variance. On the other hand, if the difference between the budgeted and actual figure are financially costly it is known as an adverse variance.

Budgets (3.9)

Is a quantitative financial plan that estimates the revenue and expenditure over a future time period. A quantitative financial plan that estimates the revenue and expenditure over a specified future time period. Is a financial plan that helps in target setting by estimating the revenue and expenditure of a business over a specified future time period. Are important for planning, motivation, resource allocation, coordination, and control. Important because: 1. Help in planning and setting targets 2. Allocating resources 3. Motivating budget holders 4. In controlling how funds have been spent. Limitations: 1. Setting budgets without involving some people could result in their resentment and affect their motivation levels.

Cash flow (3.7)

Is moeny that flows in and out of a business over a given period of time; it only includes cash transactions, not credit transactions. Money that flows in and out of a business over a given period of time. A positive cash flow simply means that more cash went in than out. A business can have a positive cash flow and yet no profit if the cash comes from sources other than income, for example, if they receive a bank loan, or if the owner puts some of their own money into the business. (These transactions will be inflows in the cash flow table, however, they are not income from sales revenue; they will appear as a liability in the balance sheet.) Is the flow of money in and out of the business and only considers cash transactions. Insolvency is when a business runs out of cash, even though it may still be profitanle: it is a problem of liquidity crisis without enough cash to run the day to day operations.

Investment (3.7)

Is the act of spending maoney to purchase a fixed asset with the expectation of future earnings. The act of spending money on purchasing an asset with the expectation of future earnings

Price

Is the amount charged to the customer ( it may be calculated from the cost itself, for example with a mark-up, or using a different pricing strategy, for example, based on competitor's prices.

Depreciation (3.4)

Is the decrease in the value of a fixed asset over time.

Variance (3.9)

Is the difference between the budgeted figure and the actual figure. The difference between the budgeted figure and the actual figure. It is calculated at the end of the budget period it can be "favourable" (when the difference between the budgeted and actual figure is financially beneficial to the firm, for example spending less than anticipated) or "adverse" (when the difference between the budget and actual figure is financially costly to the firm, for example spending more than planned)

Cost

Is the expense incurred for a product sold by a company (it includes direct and indirect costs, from the purchase of raw materials and direct labor to contribution to overheads such as insurance, cleaning, and security)

Break-even quantity (3.3)

Is the minimum number that must be sold so that all costs are covered by revenues. At this point, there is no loss but no profit either. A measure of output where total revenue equals total costs.

Revenue expenditure (3.1)

Is the money used for the day-to-day operations of a business, such as expenses that include rent, wages, raw materials, insurance, and fuel.

Budget holder (3.9)

Is the perdon responsible for the formulation and achievement of a budget. A person involved in the formulation and achievement of a budget.

Cashflow forecast

Is to do with the total inflow and outflow of cash. Cashflow represents a firm's liquidity and its ability to meet its day-to-day expenses.

Insolvency

Is when a business runs out of cash, even though it may still be profitable: it is a problem of liquidity crisis without enough cash to run the day to day operations.

Long-term finance

It is a long-term investment to purchase land or a building, for example, a long-term bank loan or share capital. Has a duration of more than five years to thirty years is funding obtained for the purpose o purchasing long-term fixed assets or other expansion requirements o a business. (Share issue, debentures, long-term loans, and grants) Duration: 5 - 20 years

Medium-term finance

It is typically for equipment or vehicles that have a specific lifespan; examples include leasing and grants. Medium-term finance that lasts from more than one year to about five years is mostly used to purchase assets such as equipment or vehicles. (Leasing, hire purchase, and medium-term loan) Duration: 1 - 5 years

Current assets (3.4)

Last to up to a year while fixed assets last for more than a year.

Copyright laws (3.4)

Laws that provide creators with the exclusive right to protect the production and sale of their artistic or literary work. Advantages: 1. Provides the owner with the exclusive right to reproduce and distribute copies of the work, prepare derivative works, and perform, display, and broadcast the work publicly. Disadvantage: 1. protects the expression of an idea, not the idea itself.

Limitations of cash flow forecasts

Limitations: 1. Make use of limited infomration 2. Relies on rough estimates 3. Cannot take into account unexpected changes in the economy 4. Cannot take into account competitors' strategies.

Evaluate (AO3)

Make an appraisal by weighing up the strengths and limitations.

Determine (AO4)

Obtain the only possible answer.

Recommend (AO3)

Present an advisable course of action with appropriate supporting evidence/ reason in relation to a given situation, problem or issue.

Explain the importance of cash flow forecast over profitability.

Profit can be calculated by subtracting total costs from total sales/revenue. A sale is recorded when an invoice is issued regardless of whether a payment has been made or not. Potential profit may be held up in assets other than cash. Cash flow is to do with the total inflow and outflows of cash. Cashflow represents a firm's liquidity and its ability to meet day-to-day expenses. A firm may be profitable but unable to meet its short-term liabilities because of a cash shortage and consequently go into receivership. Hence a cash flow statement may be ideal to see before one commits their personal capital to a business.

Suggest (AO2)

Propose a solution, hypothesis or other possible answer.

Identify (AO4)

Provide an answer from a number of possibilities.

Break-even: Label on x-axis

Quantity/ output

Why is the local community interested in financial statements?

Residents living around a particular business will want to know its profitability and expansion potential. This is because it may create job opportunities for them and lead to growth in the community. However, the residents will also be concerned about whether the business will be environmentally friendly and whether their accounts consider costs such as air or noise pollution.

Assets (3.4)

Resources of value that a business owns or that are owed to it.

Break-even: Label on y-axis

Revenue/costs ($)

Contribution

Shows how much a product contributes to the fixed costs and thus tho the overall profit of a business, after deducting the variable costs.

External sources of finance (3.1)

That are obtained outside the business include share capital, loan capital, overdrafts, trade credit, grants, subsidies, debt factoring, leasing, venture capitalists and business angels.

Retained profit (3.4)

The amount of earnings left after dividends and other deductions have been made

Contribution per unit (3.3)

The contribution per unit is needed to calculate the break-even point. The difference between the selling price per unit and variable cost per unit. Is the difference between the selling price per unit and variable cost per unit while total contribution is the difference between the total revenue and the total variable cost.

Working capital (3.7)

The difference between current assets and current liabilities

Net profit before interest and tax (3.4)

The difference between gross profit and expenses. = gross profit - expenses (= sales revenue - cost of goods sold - expenses)

Margin of safety (3.3)

The output amount exceeds the break-even quantity. Measures the difference between the break-even level o output and the actual (current) level o output in a business. The greater the difference between the break-even quantity and the sales levels, the greater the safety net or the safer a firm will be in its profit earnings.

Things to consider when choosing the appropriate source of finance for a business (3.1)

The purpose o the funds, cost, flexibility, their status and size, the amount required, gearing, and the state of the external environment.

Investment appraisal (3.8)

The quantitative techniques used in evaluating the viability or attractiveness of an investment proposal. Is the quantitative assessment o the viability of an investment proposal. It establishes whether a particular business venture is worth pursuing or profitable as well as assisting businesses in making comparisons with other different investment projects. Investment appraisal techniques include payback period, average rate o return, and net present value. Are techniques that can help with deciding the suitability of an investment opportunity. These techniques are also useful to compare competing investment opportunities. They can be combined to help decision-making.

Total revenue (3.2)

The total amount of money a firm receives from the sale of goods or services, found by multiplying the price per unit by the number of units sold. Is the income gained from the sale o goods and services. It is also known as sales revenue or sales turnover.

Advantages of Cash Flow Forecasts:

They are a useful planning tool by providing estimated projections. - Predicting problems - Planning for success - Decision making

Change in price

This leads to a shift of the total revenue line from TR1 to TR2. This indicates that the sales revenue has increased at all levels o output. The firm will also break even at a lower level of output and there will be higher profits at every output level. This can also lead to an increase in a firm's margin o safety.

Apply (AO2)

Use an idea, equation, principle, theory or law in relation to a given problem or issue.

Discounted cash flow (3.8)

Uses a discount factor that converts future cash flows to their present value.

Cyclical variations

Variations in sales occurring over periods of time of much more than a year.

Relationship between investment, profit, and cash flow

Varies at different stages of a businesss. A new business uaully requires a lot of investment (to purchase the first fixed assets) but there is no profit yet, and cahs flow is negative. An established bsuiness requires less investment, but achieves more profit, with a positive cash flow.

Adverse variance (3.9)

When the difference between the budgeted and actual amounts is financially costly to the firm.

Favourable variance (3.9)

When the difference between the budgeted and actual figure is financially beneficial to the firm.

Internal sources of finance (3.1)

Which are obtained within the business, including personal loans, retained profits, and sale o assets.

Liabilities (3.4)

a firms legal debts or what it owes to other firms, institutions or individuals

Trademark (3.4)

a recognizable symbol, word, phrase, or design that is officially registered and that identifies a product or business. Advantages: 1. asset protection: the trading name and brand logo are likely to be the focus of and registration application. 2. A registered trademark is an intellectual property right that can be exploited by the owner 3. Avoiding trademark infringement Disadvantages: 1. May not qualify for the respistration 2. Descriptive trademarks are weak marks 3. The trademark registration process is costly 4. Marketing and advertising costs will increase.

Netbook value (3.4)

an asset's net value at the beginning of an accounting period, calculated by deducting the accumulated (total) depreciation firom the cost of the fixed asset

Cash flow forecast (3.7)

is a financial document in the form of a table that shows the predicted cash inflows and cash outflows, for example, month by month. The future prediction of a firm's cash inflows and outflows over a given period of time. Is a financial document that shows the expected month by month cash receipts (cash inflows) and payments (cash outflows) of a business that has not yet occurred. When constructing the following need to be included; opening cash balance, total cash inflows, total cash outflows, net cash flows, and closing cash balance. Limitations: 1. Unexpected changes in the economy: for example, fluctuating interest rates could affect borrowing by firms and have a negative impact on their cash-flow needs. 2. Poor market research - improperly done sales forecasts due to poor demand predictions can have a negative effect on future cash sales, thereby affecting cash inflows. 3. Difficulty in predicting competitors' behavior - competitors may change their strategies often and make it hard for other businesses to predict their actions and compete with them. This can negatively affect the cash flow of a struggling business. 4. Unforeseen machine or equipment failure - breakdown of machinery is diffcult to predict, and it can drastically affect the cash position in a business. 5. Demotivated employees - being demotivated can negatively affect the productivity of workers, reducing output or sales and leading to less cash inflow.

Capital expenditure (3.1)

is a long-term investment: money spent to acquire fixed assets in a business such as machinery, equipment, vehicles, and buildings. Money spent to acquire fixed assets in a business. Is money spent to acquire fixed assets in a business, which include machinery, land, buildings, vehicles, and equipment.

Working capital cycle (3.7)

is the period of time between payment of goods supplied to a business and receiving cash from their sale. The period of time between payment for goods supplied to a business and the business receiving cash from their sale. Is the time interval between payment for goods supplied to a business and finally receiving cash from their sale. In order to effectively maximize the working capital, it is usually desirable to keep the cycle as short as possible. It should be short as possible because cash only ceases to be tied up at the end of each cycle, and profit is released when goods are sold and revenues received.

Profit

is the positive difference between sales revenue and total costs; it includes both cash transactions and credit transactions. = total revenue - total costs OR = total contribution - total fixed costs. OR = (contribution per unit * number of units sold) - total fixed costs. HENCE = total revenue - total costs

Increase in fixed costs

leading to an upward parallel shift of the total cost line from TC1 to TC2. An increase in fixed costs leads to an increase in total costs by the same amount at every level o output. Break-even quantity also increases and profits decrease at all levels o output. This also decreases the margin of safety.

Price-elasticity of demand

measures the responsiveness of demand for one product, when the price of another change. The term is used to help define substitutional and complimentary relationships between products.

FIFO (first in, first out)

method of inventory valuation is a cost flow assumption that the first goods purchased are also the first goods sold. In most companies, this assumption closely matches the actual flow of goods, and so is considered the most theoretically correct inventory valuation method. A method of stock valuation involves issuing stock in the order in which it is delivered so that the remaining stock is valued closer to its replacement cost.

Liquidity ratios (3.5)

Measures the ability of a business to pay off its short-term debts, i.e. how quickly current assets could be converted into "liquid cash."Measure the ability of a firm to pay off its short term debt obligations with two examples being current ratio and acid test (quick) ratio.

Gearing ratio (3.6)

Measures the extent to whcih the capital employed by a business is financed from loan capital. Put it another way, this is the level of debt of a business. Measures the extent to which the capital employed by a firm is financed from loan capital. A highly geared business (with a ratio of 50% above) is seen as risky by financers. Measures the percentage to which the capital employed by a firm is financed from loan capital to establish whether it is high geared or low geared. Could be reduced by seeking sources of finance other than a loan, for example issuing more shares.

Short-term finance (3.1)

Money needed for the day-to-day running of a business and therefore provides its needed working capital. Should be paid back within 12 months, for example, bank overdrafts and trade credit. Which lasts for one year or less provides a business with its needed working capital. (bank overdrafts, bank loan, creditors, factoring) Duration: <12 months

Profit (3.3 & 3.7)

Obtained by subtracting total fixed costs from the total contribution. Can be obtained by getting the difference between the total contribution and the total fixed cost or by subtracting the total costs from the total revenue to obtain a positive value. The positive difference between sales revenue and total costs when both cash and credit transactions are considered

Discuss (AO3)

Offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.

Goodwill (3.4)

The value of positive or favorable attributes that relate to a business. Advantages: 1. Encorugaes brand loyalty 2. Encourages forgiveness 3. Sets you apart from the competition 4. Impvoes the value of your business

Intangible assets (3.4)

These are not physical, cannot easily be quantified and showed on a balance sheet, even though they add value to a business. Fixed assets that lack physical substance or are non-physical in nature. Are fixed assets that lack physical substance or are non-physical in nature and can be very valuable to a firm's long-term success. Main examples include trademarks, patents, goodwill, and copyright.

Loan capital (3.1)

(also known as "debt capital"): money from a financial institution, such as a bank; it is repaid in installments with interest (a fixed or variable rate) Money sourced from financial institutions such as banks, with interest charged on the loan to be repaid. Advantages: 1. Accessible and can be arranged quickly for a firm's specific purpose. 2. Its repayment is spread out over a predetermined period of time, reducing the burden to the business for having to pay it in a lump sum. 3. Large organizations can negotiate for lower interest charges depending on the amount they wish to borrow. 4. Owners still have full control if not shares are issued. Disadvantages: 1. Capital will have to be redeemed even though the business is making losses and in come cases collateral (security) will be required before any funds are lent out. 2. Failure to pay the loan may lead to seizure of a firm's assets. 3. Variable interests may increase which could lead to a high debt replayment burden. Examples for use: 1. Bank loan - be used to purchase machinery such as a delivery van. (They are flexible but bank will require supporting documentation and are likely to ask for security which may be lost if the business dalls behind with payments.)

Debt factoring (3.1)

A financial arrangement with a "debt factor", i.e. a third business taking responsibility for collecting payment; keeps a percentage of the owed debt as payment for its services. A financial arrangement where the debt factor takes on the responsibility for collecting the debt owed to the business and provides the business with a percentage o the owed debt in cash. Advantages: 1. Gets immediate cash that can be used to fund other activities or projects. 2. The risk or responsibility of collecting the debt is passed on to the factor. Disadvantages: 1. A business loses a percentage of its profits because it does not receive the full debt repayment and debt factors are known to charge high administrative and service fees to do their job. 2.A business may risk losing a loyal customer if the debt factor uses harsh means of collecting the debt such as threatening to take the customer to court for failing to pay the debt.

Balance sheet (3.4)

A financial statement that outlines the assets, liabilities, and equity of a firm at a specific point in time. Is a snapshot of the financial position of a firm and is used to calculate a firm's net worth. It gives the firm an idea o what it owns (assets) and owes (liabilities) including how much shareholders have invested in it (equity). A firm's net assets should equal its equity.

Retained profit (3.1)

A form of internal finance. For an existing business (as opposed to a new start-up) this is what remains after payment of tax (to the government) and dividend (to the shareholders); it can be described as a form of reinvestment and also called "plowed-back profit." The profit that remains after a business has paid corporation tax to the government and dividends to shareholders. Advantages: 1. Cheap because no interest charges 2. Permanent source of finance as it does not have to be repaid. 3. Flexible and can be used a desired. 4. Owners have control over their profits without interference from financial institutions. Disadvantages: 1. Start-ups will not have any retained profit as they are new ventures. 2. If retained profit is too low, it may not be sufficient for expansion. 3. Owners may overuse the retained profit and leave no buffer for emergencies or for future growth oppotunities. 4. A high retained profit may mean that either very little or nothing was paid out to shareholders as dividends. Retained profit = net profit after interest and tax - dividends

Leasing (3.1)

A form of medium-term finance. A source of finance that allows a firm to use an asset without purchasing it, but renting it, with periodic payments. Advantages: 1. A firm does not have to have a high initial capital outlay to purchase the asset. 2. Leasing is useful when particular assets are required only for short periods of time or occasionally. Disadvantages: 1. In the long run leasing can turn out to be more expensive than the outright purchase of an asset due to the accumulated total costs of the leasing charges. 2. A leased asset cannot act as collateral for a business seeking a loan as an additional source of finance.

Grants (3.1)

A form of medium-term finance. Funds provided by the government or other organizations such as foundations or agencies, often following a bid (application, proposal) which may be competitive. Funds usually provided by a government, foundation, trust, or other agency to businesses that do not need to be repaid. Do not have to be repaid. In most cases, grantmakers are very selective of who receives the grant. The advantage is that it does not have to be paid back bu the recipient. The disadvantage is that it mostly comes with "strings attached" depending on the objective of the grant maker. Examples of use: 1. for purchasing land and buildings. (May be available from the government or some regional grouping such as the EU or NAFTA. Other independent agencies may offer finance for specialist groups auch as young entrepreneurs or new businesses. This are restrictive in nature and may not be avaliable)

Overdrafts (3.1)

A form of short-term finance. When a lending institution (such as a bank) allows a business to withdraw more money than it has on its account, for a short, temporary period of time. When a lending institution allows a firm to withdraw more money than it currently has in its account. Advantages: 1. Provides an opportunity for firms to spend more than they have in their account, which greatly helps in settling short-term debts such as paying suppliers or the wages of staff. 2. Flexible form of finance as its demands will depend on the need of the business. 3. Charging interest only on the amount overdrawn may make it even cheaper than loan capital. Disadvantages: 1. Banks can ask for the overdraft to be paid at a very short notice. 2. Due to the variable nature of an overdraft, the bank may at times charge high interest rates.

Acid test ratio (3.5)

A liquidity ratio. A stringent ratio that subtracts stock from the current assets and compares this to the firm's current liabilities. (Current assets - stock) / current liabilities. 1 < ratio < 2 Should be around 1.5. Low ratios (under 1) mean that the business could struggle to pay off its debts. High ratios (above 2) should be avoided too, as they could mean that there is too much cash being help unnecessarily and not invested, or that there are too many debtors. Example: If the ratio is 1.4 that is expressed as 1.4:1. This means that for every $1 dollar of current liabilities the firm has $1.4 dollars of current assets less stock. Strategies to improve: 1. Could be improved if a business tries to increase current assets and/or decrease current liabilities or both. 2. Selling off the stock is another possibility. 3. A firm could sell off stock at a discount for cash. This will help improve the liquidity position o the business and avail more working capital to pay off its short-term debts. However, selling stock at a discount may reduce the revenue generated from the sold stock, thereby reducing the firm's profits. 4. A firm might increase the credit period for debtors to purchase more stock on credit. The problem here is that it may lead to increased bad debts in the business.

Straight-line depreciation (3.4)

A method that spreads out the cost of an asset equally over its lifetime by deducting a given constant amount of depreciation of the asset's value per annum. spreads out the cost of an asset equally over its lifetime by deducting a given constant amount of depreciation o the asset's value per annum. This method is commonly used as it is simple to calculate. The cost is equally spread over the lifetime of the asset, using the following formula: Annual depreciation = (original cost - residual value)/expected life of asset Advantages: 1. SImple to calculate as it is a predictable expense that is spread over a number of years. 2. It is mostly suitable for less expensive items, such as furniture, that can be written off within the asset's estimated useful life. Disadvantages: 1. Not suitable for expensive assets such as a plant and machinery as it does not father for the loss in efficiency or increase in repair expenses over the useful life of the asset. 2. Known to inflate the value of some assets with may have lost the greatest amount of value in their first or second years, such as motor vehicles. 3. It does not take into account the fast changing technological environment that may render certain fixed assets obsolete very quickly.

Debtor days ratio (3.6)

About the number of days it takes a business to collect its debts from the customers who have paid on credit, and thus owe money to the business. Measures on average, the number of days it takes for a firm to collect its debts. Measures the average number of days it takes for a firm to collect money from its debtors. It is also known as the debt collection period. This could be lowered by giving incentives to debtors to pay their debts early, or fining late payers.

Creditor days ratio (3.6)

About the number of days it takes a business to pay its own debts to its creditors (e.g. tyipically to its suppliers) Measures the average number of days a firm takes to pay its creditors. Assesses how fast in number of days within a year a firm is able to pay its creditors. This ratio could be improved by negotiating extra time with suppliers ("trade credit")

Reducing-balance depreciation (3.4)

A method where a predetermined percentage depreciation rate is used and subtracted from the netbook value o the previous year. Adopts an accelerated depreciation technique whereby the depreciation amount charged to an asset decline over time-based on the useful life of the asset. Applying a percentage depreciation rate over the lifetime of the asset (always the same percentage) MIDDLE TIITL: Reducing balance with annual rate of X% OR Year, depreciation and net book value. Advantages: 1. Is more realistically maches the cost and revenue of the business. This is because the higher amount of depreciation provided in the early years is matched against the larger amount of revenue generated by the increased production brought about by the use of the new asset. 2. It provides a more accurate measure of depreciation compared to the straight-line method, especially in the valuation of assets over the years. 3. It increases the non-cash expenses immediately, which lowered the income tax expense in the early years, thereby improving cash flow. Disadvantages: 1. More complex than straight-line method. 2. Charges high amounts of depreciation in the early years, which may not be realistic for some less expensive assets. 3. The formula used to obtain the rate of depreciation may be subjective because without residual value it cannot be used. It that lowered profits, which some stakeholders, especially of the company is publicly traded on a stock exchange, might object to. 4. It defers tax payments for later years, which is not a problem if the company keeps growing and increasing in profits. However, if a company experiences difficulty, growth, and profits slow or go down and the company has to delay future capital expenditures, the income tax burden will increase just as the company is facing flow pressures from slowed or declining sales and operating profits.

Current ratio (3.5)

A ratio that compares a firm's current assets to its current liabilities. 1 < ratio < 2 Should be around 1.5. Low ratios (under 1) mean that the business could struggle to pay off its debts. High ratios (above 2) should be avoided too, as they could mean that there is too much cash being help unnecessarily and not invested, or that there are too many debtors. Current assets / current liabilitites. Example: If the ratio is 2 that is expressed as 2:1. This means that for every $1 dollar of current liabilities the firm has $2 dollars of current assets. Strategies to improve: 1. if a business tries to increase current assets and/or decrease current liabilities or both. 2. Selling off the stock is another possibility. 3. may reduce bank overdrafts and choose instead to seek long-term loans. This helps to reduce the current liabilities and hence improve the current ratio. However, increasing long-term loans could increase the interest payable and the gearing ratio of the business, thereby affecting its efficiency and future liquidity position. 4. Another strategy would be to sell existing long-term assets for cash. This increases the available working capital for the business. The disadvantage is that if the long-term assets are needed back the business will face the cost o leasing them.

Working capital (3.4)

Also known as net current assets, helps establish whether a firm can pay its day-to-day running costs. Working capital = current assets - current liabilities.

Equity (3.4)

Also known as shareholders equity, shows how the net assets are financed using shareholders' capital and retained profit

Profit and loss account (3.4)

Also known as the income statement, shows the records of income and expenditure flows of a business over a given time period. Shows the records of income and expenditure flows of a business over a given time period and is also known as an income statement.

Trade credit (3.1)

An agreement between businesses that allows the buyer to pay the supplier later, after a period of time, such as one to three months. An agreement between businesses that allows the buyer o goods or services to pay the seller at a later date. A form of short-term finance. Advantegs: 1. By delaying payments to suppliers, businesses are left in a better cash-flow position than if they paid cash immediately. 2. Can be an interest-free means of raising funds for the æength of the credit period. Disadvantages: 1. Debtors (trade credit receivers) lose out on the possibility of getting discounts had they purchased by paying cash. 2. Delaying payment to creditors after the agreed period may lead to the development of poor relations and suppliers may even refuse to engage in future transactions with the debtors. Example: 1. To purchase stock of finished goods for resale. (the firm has both the goods and the money to pay for it and the firm may be offered a discount to pay the invoice earlier.)

Return on capital employed (ROCE) (3.5)

An efficiency ratio. Assesses the returns a from is making from its capital employed. An example of an effciency ratio that assesses how well a firm internally utilizes its assets and liabilities. Can be improved if a business pay more dividends to shareholders, reducing the retained profit and thus increasing ROCE. The higher the better. Example: 20% means that for every $100 of capital invested, the firm generates $20 as its net profit before interest and tax. Strategies to improve: 1. should try to reduce the amount of loan capital while still ensuring that net profit remains unchanged or does not fall. The problem with this is that the loan capital may be needed to purchase essential fixed assets such as machinery, which will aid in the further production of goods that could be sold to generate more profit. 2. a firm may declare and pay additional dividends to shareholders. This will have the effect of reducing the retained profit, and hence raising ROCE, assuming net profit remains unchanged or does not decrease. THe drawback is that reducing retained profit leads to less ploughed-back profit for future investment.

Residual value (3.4)

An estimation of an asset's worth or value over its useful life, also known as scrap or salvage value

Personal funds (3.1)

An internal source of finance. Sole traders often use their own savings, sometimes with external sources of finance, for example, to show a bank their personal commitment. A source of finance for sole traders that comes mostly from their own personal savings. Advantages: 1. Shows commitment to the business 2. A good signal to other investors or financial institutions that the business might need to approach for additional sources of finance. 3. Cheap 4. Easily available 5. No interest to be paid. Disadvantages: 1. Poses a great risk to the powers or sole traders because they could be investing their life's savings. 2. May not be large enough hence making a start-up or maintenance of business difficult.

Final accounts (3.4)

Are financial statements compiled by businesses at the end o an accounting period that inform internal and external stakeholders about the financial position and performance of an organisation.

long-term liabilities (3.4)

Are payable after a year while short term liabilities are payable within a year.

Gross proft margin (GPM) (3.5)

Calculated by dividing the gross profit by the sales revenue, expressed as a percentage. The higher the better. Example: 70% means that for every $100 of sales the business makes $70 as its gross profit. Strategies to improve: 1. Firm could increase prices of products in less competitive markets or markets where consumers are less sensitive to price changes. 2. Could source cheaper suppliers of materials to cut down on these purchase costs. This will help to reduce the cost of sales and help increase GPM. 3. Might adopt more aggressive promotional strategies that will persuade the customers to buy its products. This may ensure that they do not use expansive campaigns that will lead to increased costs. 4. may aim to reduce direct labor costs by ensuring that its staff are more productive or are able to sell more units of goods produced. Unproductive staff may need to be shed. WIthout negatively impacting morale.

Net proft margin (NPM) (3.5)

Calculated by dividing the net profit before interest and tax by the sales revenue, expressed as a percentage. The higher the better. (hence meeting expenses well) Example: 50% means that for every $100 of sales revenue made the business makes $50 in NPM. Strategies to improve: 1. Can carefully check on the indirect costs to see where unnecessary expenses may be avoided, for example, reduce expenditure on expensive holiday packages for senior managers. 2. A firm could negotiate with key stakeholders with the aim to cut costs, for example with landlords for cheaper rent or with suppliers for product discounts. However negotiating for cheaper rent could lead to a firm moving to another location which may not be ideal, with a poorer customer image.

Examine (AO3)

Consider an argument or concept in a way that uncovers the assumptions and interrelationships of the issue.

To what extent (AO3)

Consider the merits or otherwise of an argument or concept. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.

Semi-variable costs (3.2)

Costs comprising both fixed and variable components. Examples: Fixed salary + overtime or fixed salary + commission. Are costs that have both fixed and variable components and are also known as semi-fixed costs or mixed costs.

Direct cost (3.2)

Costs linked to the production of specific goods and services ( and thus to a specific "cost center") Costs that can be identified with the production of specific goods or services. Examples: raw materials, direct labor, and packaging costs. Are expenses that can be directly traced to a particular product, department or cost centers while indirect costs are not clearly identified with the production of specific goods or services.

Indirect costs (3.2)

Costs that cannot be linked to the production of goods and services - also called "overheads" Costs that are not clearly identified with the production of specific goods or services. Examples: rent, general administrative expenses, insurance, maintenance, cleaning and security.

Variable costs (3.2)

Costs that change in direct proportion to the output of a firm (e.g. raw materials, sales commission.) Change with the number of goods or services produced. Costs that change with the number of goods or services produced. Examples: raw material costs, sales commission, packaging, and energy usage costs. 1. Are dependent on the amount produced. 2. The higher the output levels, the higher the variable costs. 3. If nothing is produced no variable costs will be incurred.

Fixed costs (3.2)

Costs that do not change when the level of output changes (e.g. rent, rates, interest.) Do not change with the number of goods or services produced. They only remain constant in the short-term. Costs that do not change with the number of goods or services produced. Examples: rent/mortgage, insurance, salaries, and interest payments. 1. Are incurred by a business irrespective/regardlessCosts that do not change when the level of output changes (e.g. rent, rates, interest) of output. 2. They will occur even if nothing is produced and remain the same as the production increases or decreases.

Construct (AO4)

Display information in a diagrammatic or logical form.

Net profit after interest and tax (3.4)

Equal to net profit before tax less tax

Venture capital (3.1)

Financial capital provided by investors to high-risk, high-potential start-up firms or small businesses. Capital provided by investors (such as investment banks, as opposed to high street banks) to high-risk, high-potential start-up enterprises or small businesses. Advantages: 1. They provide funding to businesses that other institutions might regard as too high risk. 2. In an effort to protect their investment they are involved in the firm's decision-making by providing the required guidance where it is needed. The disadvantage is that venture capitalists may set very high-profit targets for the start-up businesses they invest in and if these are not attained they usually increase their equity stake in these firms, often by a large percentage. Example for use: 1. For the purchase of land and buildings as a long-term capital investment where venture capitalists or business angles may offer finance for higher risk ventures where more conventional means fail. However, the investor may require some part ownership, although it will often be a minority shareholding.

Net profit before tax (3.4)

Found by subtracting interest from net profit before interest and tax

Net assets (3.4)

Found by subtracting long-term liabilities from total assets less current liabilities. = total assets - current liabilities - long-term liabilities.

Outline (AO1)

Give a brief account or summary

Describe (AO1)

Give a detailed account

Explain (AO2)

Give a detailed account including reasons or causes.

State (AO1)

Give a specific name, value or other brief answer without explanation or calculation.

Compare and contrast (AO3)

Give an account of similarities and differences between two (or more) items or situations, referring to both (all) of them throughout.

Contrast (AO3)

Give an account of the differences between two (or more) items or situations, referring to both (all) of them throughout.

Compare (AO3)

Give an account of the similarities between two (or more) items or situations, referring to both (all) of them throughout.

Define (AO1)

Give the precise meaning of a word, phrase, concept or physical quantity.

Justify (AO3)

Give valid reasons or evidence to support an answer or conclusion.

Gross profit (3.4)

Gross profit = sales revenue - cost of goods sold. Found by deducting cost of goods sold from sales revenue.

Profitability ratios (3.5)

Help assess the performance of a business based on its ability to generate profit. That assess a firm's ability to generate profit include gross profit margin (GPM) and net profit margin (NPM).

Stock turnover ratio (3.6)

Measures how quickly the stick is sold and replaced. Measures how quickly a firm's stock is sold and replaced over a given period. Could be improved by adopting a JIT method of production.

Business angles (3.1)

Highly affluent individuals who provide financial capital to small start-ups or entrepreneurs in return for ownership equity in their businesses. Rich individuals who invest in start-up enterprises in return for a part-ownership and some control in its strategic development. Advantages: 1. they give more favorable terms than other institutions or lenders of small or start-up businesses because they are known to invest in the person rather than how viable a business venture is. 2. Focus on helping a business succeed by using their extensive business experience coupled with good financial capital. The key disadvantage is that the angle investor may assume a good degree of control or ownership in the business they invest in, therefore diluting the ownership of the entrepreneur.

Demonstrate (AO2)

Make clear by reasoning or evidence, illustrating with examples or practical application.

Distinguish (AO2)

Make clear the differences between two or more concepts or items.

Plot (AO4)

Mark the position of points on a diagram.

Stock turnover ratios (3.6)

Measures how fast a firm's stock is sold and replenished over a given period. It can be measured in two ways. Firstly, it assesses how many times in a given period a firm sells its stock and secondly, it considers the number o days it takes for a firm to sell its stock.

Patents (3.4)

Provide inventors with the exclusive rights to manufacture, use, sell or control their invention of a product. The inventor are provided with the exclusive rights to manufacture, use, sell, or control their invention of a product. Advantages: 1. Gives the right to stop others from copying, selling, or importing you invention without permission. 2. Get protection for a pre-determined period, allowing you to keep competitors at bey Disadvantages: 1. Can be very time consuming and a lengthy process (typically 3 - 4 years) 2. Markets may change or technology may overtake your invention by the time you get the patent.

Prepare (AO4)

Put given data or information from a stimulus/ source into a suitable format.

Draw (AO4)

Represent by means of a labelled, accurate diagram or graph, using a pencil. A ruler (straight edge) should be used for straight lines. Diagrams should be drawn to scale. Graphs should have points correctly plotted (if appropriate) and joined in a straight line or smooth curve.

Cost of goods sold (COGS) (3.4)

The direct cost of producing or purchasing the goods that were sold during that period

Target profit output (3.3)

The level of output that is needed to earn a specified amount of profit. (Fixed costs + target profit)/ Contribution per unit OR (Fixed costs + target profit)/ (target price - variable costs per unit)