Business Fundamentals: cram pack

Formula sheets, the key method steps for every topic and 8 practice problems, with full solutions at the back.

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1Formulas and methods

Break-even analysis

Contribution margin
CM = p − v
Break-even quantity
QBE = FC/(p − v)
Target profit
Q = (FC + profit)/(p − v)
Profit
π = (p − v)·Q − FC
Margin of safety
(Q − QBE)/Q

2Practice problems

1.Marketing principlesMedium

A customer is buying a first new car. How does this high-involvement purchase usually differ from buying a pack of chewing gum?

  1. AThe buyer searches for more information and compares alternatives carefully
  2. BThe buyer is not influenced by the brand at all
  3. CThe buyer decides on impulse at the checkout
  4. DThe buyer skips the evaluation stage
2.Marketing principlesHard

A supermarket sells bread below cost to attract shoppers who then buy other, higher-margin items. This is:

  1. APrice skimming
  2. BCost-plus pricing
  3. CLoss leader pricing
  4. DValue-based pricing
3.Economics conceptsMedium

If the ECB raises its main interest rate, the most likely short-term effect is:

  1. AHigher borrowing and spending, which adds to inflationary pressure
  2. BAn immediate rise in GDP
  3. CLower borrowing and spending, reducing inflationary pressure
  4. DA fall in the value of the euro
4.Economics conceptsHard

A deadweight loss represents:

  1. AThe loss of total surplus when output differs from the efficient level
  2. BThe profit of a monopolist
  3. CLosses made by firms that are forced to leave the market in the long run
  4. DThe tax revenue collected by the government
5.Financial accountingMedium

Net working capital is:

  1. ANon-current assets minus long-term loans
  2. BRevenue minus operating expenses
  3. CCurrent assets minus current liabilities
  4. DTotal assets minus total liabilities
6.Financial accountingHard

Under IFRS, how is purchased goodwill treated after acquisition?

  1. AIt is revalued upwards every year
  2. BIt is amortised over 20 years
  3. CIt is not amortised but tested for impairment at least annually
  4. DIt is written off against equity immediately
7.Break-even analysisMedium
Q€revenuetotal costfixed costQ = ?

A product sells for €28 per unit with a variable cost of €8 per unit. Fixed costs are €30 000 per month. How many units Q must be sold per month to make a profit of €5 000?

F = €30 000p = €28v = €8profit = €5 000
Q = units
8.Break-even analysisHard
F = €10 000, Q = ?sales mix2 × Ap = €17v = €121 × Bp = €30v = €20

A company sells two products. Product A sells for €17 with a variable cost of €12; product B sells for €30 with a variable cost of €20. They sell in a fixed mix of 2 units of A for every 1 of B. Fixed costs are €10 000 per month. Find the total number of units Q (A and B together) needed to break even.

pA = €17, vA = €12pB = €30, vB = €20A : B = 2 : 1F = €10 000
Q = units

3Solutions

1.Marketing principles

Answer: A · The buyer searches for more information and compares alternatives carefully

Why this is the answer

High involvement leads to extended problem solving with much information search and evaluation. Low-involvement items are bought by habit or impulse.

Answer

A · The buyer searches for more information and compares alternatives carefully
2.Marketing principles

Answer: C · Loss leader pricing

Why this is the answer

A loss leader brings traffic into the store. It works when customers buy enough profitable items during the same visit.

Answer

C · Loss leader pricing
3.Economics concepts

Answer: C · Lower borrowing and spending, reducing inflationary pressure

Why this is the answer

Higher rates make credit more expensive and saving more attractive, reducing demand and inflation; they also tend to strengthen the currency.

Answer

C · Lower borrowing and spending, reducing inflationary pressure
4.Economics concepts

Answer: A · The loss of total surplus when output differs from the efficient level

Why this is the answer

Deadweight loss is the reduction in combined consumer and producer surplus caused by distortions such as taxes, monopoly or price controls.

Answer

A · The loss of total surplus when output differs from the efficient level
5.Financial accounting

Answer: C · Current assets minus current liabilities

Why this is the answer

Working capital measures the short-term resources available for daily operations: inventory, receivables and cash minus short-term obligations.

Answer

C · Current assets minus current liabilities
6.Financial accounting

Answer: C · It is not amortised but tested for impairment at least annually

Why this is the answer

Goodwill has an indefinite life under IFRS. It is allocated to cash-generating units and tested for impairment yearly, or more often if there are signs of impairment.

Answer

C · It is not amortised but tested for impairment at least annually
7.Break-even analysis

Answer: Q = 1750 units

Cost-volume-profit: each unit sold earns a contribution margin, price minus variable cost per unit. Profit = Q·(p − v) − F, where F is the fixed cost. At the break-even point profit is zero, so Q = F/(p − v).

Contribution margin per unit

p − v = 28 − 8 = €20

Units for the target profit

Q = (F + profit)/(p − v) = (30 000 + 5 000)/20 = 1 750

Answer

Q = 1 750 units
8.Break-even analysis

Answer: Q = 1500 units

Break-even with a sales mix: when products sell in a fixed ratio, use the weighted average contribution margin: weight each product's p − v by its share of units. Break-even units = F/(weighted contribution margin), split again in the mix ratio.

Contribution margins

cmA = €5, cmB = €10

Weighted contribution margin

(2·5 + 1·10)/3 = €6.67

Break-even units

Q = 10 000/6.667 = 1 500
A: 1 000, B: 500

Answer

Q = 1 500 units

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