Financial Terms And Calculations
Overview
A tailor in Kaduna rents a workshop for 40,000 naira a month whether she sews one dress or four hundred. Every dress she sews costs her 900 naira in fabric and thread, and she sells each one for 2,400 naira. She has never worked out how many dresses she has to sell before the month stops costing her money and starts paying her, and she does not need to be an accountant to do it: the answer is a single division that would take her ninety seconds. Until she does it, every decision she makes about price, about hours and about whether to take on an apprentice is a guess.
This lesson gives you the arithmetic that turns those guesses into decisions. You will separate fixed costs from variable costs and build revenue, total cost and profit from them; find the break-even output and the margin of safety by reading a set of figures rather than by memorising a formula; and calculate the payback period on an investment, which is the calculation this specification asks for most often. Two things the specification says in writing are worth knowing before you start: you will not be asked to draw a break-even chart or to use the break-even formula, and you will not be given any formulae in the exam.
Objectives
- Basic financial terms.
- Basic financial calculations.
- Break-even.
- Payback period.
Mind map
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Lesson Note
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Lesson Evaluation
Congratulations on completing the lesson on Financial Terms And Calculations. Now that youve explored the key concepts and ideas, its time to put your knowledge to the test. This section offers a variety of practice questions designed to reinforce your understanding and help you gauge your grasp of the material.
You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- A business has variable costs of 3.00 dollars per item manufactured and fixed costs of 500 dollars. What is the total cost of manufacturing 1,000 items? A. 500 dollars B. 3,000 dollars C. 3,500 dollars D. 5,000 dollars Answer: C
- Which one of the following is a fixed cost for a bakery? A. Flour used to make bread B. Paper bags for customers C. Insurance on the shop D. Electricity used by the ovens Answer: C
- A business breaks even at 900 units and expects to sell 1,150 units. What is its margin of safety? A. 250 units B. 900 units C. 1,150 units D. 2,050 units Answer: A
- A machine costs 60,000 and produces net cash inflows of 15,000 a year. What is the payback period? A. 2 years B. 4 years C. 15 years D. 45 years Answer: B
- At the break-even level of output, which one of the following is true? A. Revenue is greater than total costs B. Revenue equals total costs C. Revenue equals fixed costs D. Variable costs equal fixed costs Answer: B
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