Edexcel Business Linear

A Level
Formulae/calculations for entire course

Formulas

Name Formula Notes

Percentage Increase = New number – original number
change
Increase %ge increase = Increase x 100
Original Number

Percentage Decrease = Original number – New number

change
Decrease %ge increase = Decrease x 100
Original Number

Theme 1
PED> -1 = price elastic
PED PED = %ge change in quantity demanded demand
%ge change in price
PED< -1 = price inelastic
demand

(would expect the answer

to be a negative figure as
inverse relationship
between price and quantity
demanded)

YED YED = %ge change in quantity demanded Positive figure<1 = normal

%ge change in income good
Positive figure>1 = luxury
good (more income elastic)

Negative figure = inferior

good, if >-1 then more
income elastic

Market Share Market share % = Gives an idea of how much

% power a particular firm has
Total sales of a firm x 100 in the market
Total sales in market

1
 Theme 2
Sales Revenue Sales Revenue = Selling price x sales volume Income from sales
Also known as Turnover

Sales Volume Sales Volume = Sales revenue How many items are sold
Selling price (the sales quantity)

Contribution Contribution = Selling price per unit – variable costs p/u A contribution to fixed costs
per unit per unit then profit

Total Total Contribution = Contribution per unit x number of The sales revenue minus
Contribution units sold the total variable costs

Profit/Loss Profit = Total contribution – fixed costs Represents the reward to

business owners.
Or, Profit = Total Revenue – Total Costs Negative figure shows that
the business revenue is
Generally, higher the better, depending on the firms insufficient to cover the
objectives. costs. Losses cannot be
sustained for ever!

Budget Actual Figure – budgeted figure Variances may be be

Variance Adverse or Favourable

Break even Shows that the firm is

point Break even point = is where Total revenue = total costs making neither a loss or a
profit.

Break even Break even output = Total fixed costs It represents how many
output Contribution per unit items the firm has to sell
just to cover its costs.
Always round up to a whole
number.
Margin of Margin of Safety = The bigger the margin of
Safety safety, the lower the chance
Current sales volume/output – break even output of the firm making a loss if
costs rise or revenue falls.

Gross profit Gross profit = Revenue – Total variable costs (cost of How much profit is made
sales) from trading before
overheads (fixed costs) are
deducted.
Operating profit = Gross profit - Fixed costs (overheads/ Represents the normal
Operating expenses) profit from running the
profit business

2
Net profit for Net profit for year = Operating profit +/- finance costs or income Represents the final
year profit before tax

Gross profit Gross profit margin = Gross profit x 100 How effective business
margin Revenue is at selling products,
ie how much it makes
to cover cost of
sales/other expenses.
Higher = better

Operating Operating profit margin = Operating profit x 100 How effective is

profit margin Revenue business at controlling
costs. Higher is better.

Net profit Net profit margin = Net profit x 100 How effective is the
margin Revenue business at turning
sales into profits.
Higher is better.

Current ratio Current ratio = Current assets Ability to pay bills in

Current liabilities next 12 months. Ideal
= 1.5 to 2. Lower =
struggle to pay debts
quickly

Acid ratio Acid ratio = Current assets - stocks Ability to pay debts
Current liabilities assuming cant sell
stock. 1 = ok. Less than
1 stock being held too
long

Working Working capital = Current assets – current liabilities Cash to pay day to day
capital operations.

Net Cashflow Net Cash flow = Cash inflow – cash outflow Negative net cashflow
suggests a working
capital problem

Productivity Labour productivity = Output per time period Higher is better

Number of employees at work
Higher productivity
leads to lower unit
costs
Capacity Capacity utilisation = Actual output x 100 Higher is better as it
utilisation Maximum possible output will help to lower your
fixed costs per unit

3
 Theme 3
Total Capital Represents the money
employed Total Capital Employed = Total Equity + Non-current liabilities that has been used to
fund the business

Gearing ratio Non Current Liabilities x 100 Focuses on the level of debt
Total Capital employed in the financial structure of
a business
All figures can be found in Statement of financial position High gearing (>60%) can
mean high business risk
Low gearing< 30% (but not always- depends
on the market)
High gearing >60%

The percentage return

ROCE % ROCE = Operating Profit x 100 that is made on the
(return on Total Capital employed money that has been
capital invested in the business,
employed) Operating profit is found in the Statement of Comprehensive so the higher the better
ratio income Many investors expect
>20% ROCE but this will
Total capital employed can be calculated from the Statement of depend on current
financial position interest rates

Absenteeism Absenteeism rate % High levels can be an

Rate % indicator of low morale
= Total Number absent per period x 100 among staff & creates
Average number employed per period cost for firms.

Labour Labour turnover rate % Higher rates may mean

Turnover % more recruitment and
= Total Number of employees leaving per period x 100 training needed, adding
Average number of employees per period to costs.

Labour Labour retention rate %

retention rate High levels can suggest
% = Total number of employees remaining per period x 100 better motivation and
Average number of employees per period loyalty of staff

Centred Eg Centred moving 3 month average February = (Jan) 48,000 + Calculating moving
Moving (feb) 57,000 + (Mar) 51,000 = 156,000 average help show trend
average 3 April = Feb, Mar, April when say sales random
month Feb centred 3 month average = 156,000
3
= 52,000

4
Payback Payback = How long it takes to get back the money invested
Period The shorter the better as
Example 1, Investment cost £5m: longer payback periods
Year Net return £m Cumulative return £m more likely to suffer from
1 2 2 uncertainty about the net
2 3 5 return (remember they are
3 3 8 only forecasts!)
So Payback period is exactly 2 years

Example 2, Investment cost £6m

Year Net return £m Cumulative return £m
1 1 1
2 4 5
3 7 12

Payback period is 2 years plus (you still need an extra £1m from the
£7m due in year 3 to get your £6m back)
So calculate 1 divided by 7 multiplied by 12 to get the number of
months
Answer : Payback period is 2 years and 1.71 months

Average rate of ARR % = Average annual profit* x 100 Represents how much
return Investment cost return, on average, the
business is getting on its
So you have to calculate the Average annual profit first investment.

*Average annual profit (net return per annum) Higher = better.

= Total Returns – Investment cost
Project life

So for Example 2 above:

Average annual profit = £12m-£6m = £2m

3

ARR % = £2m x 100 = 33.33%

£6m

NPV = Total discounted returns – investment cost

Net Present You will be given discount
Value Example: Investment cost = £5m factors* if you need to
Year Net 5% Discount Discounted calculate this.
Return factors* (b) returns £
£m (a) (a x b) Higher NPV the better
1 2 0.952 1,904,000
2 3 0.907 2,721,000 If the NPV is negative it is
3 3 0.864 2,592,000 not worth doing the
total £7,217,000 investment (provided
Total discounted returns = £7,217,000 realistic discount rates have
been used)
NPV = £7,217,000 - £5,000,000
= £2,217,000 so worth doing this investment

5
Don’t forget that quantitative skills can also be tested using the following areas
of the specification:
● Decision Trees
● Critical Path Analysis
● Interpreting figures in the Statement of Comprehensive Income (Profit and
Loss Account)
● Interpreting figures in the Statement of Financial Position (Balance Sheet)