Business Arithmetic and Financial Calculations
What the domain tests
Cost classification, contribution, break-even, margin of safety, mark-up and discount, interest and depreciation. Expect short numerical questions and multi-step calculations.
Core relationships
- Fixed cost (FC) does not vary with output; variable cost (VC) varies directly.
- Contribution per unit = selling price (SP) − variable cost per unit.
- Total contribution = sales − total variable cost = fixed cost + profit.
- P/V ratio = contribution ÷ sales × 100.
Break-even
BEP (units) = FC ÷ contribution per unit. BEP (rupee sales) = FC ÷ P/V ratio. Margin of safety (MoS) = actual sales − break-even sales; MoS % = MoS ÷ actual sales × 100. Profit = contribution − fixed cost = MoS × P/V ratio.
Mark-up, discount, interest, depreciation
Mark-up is computed on cost; margin is computed on selling price - they are not interchangeable. Successive discounts apply one after another, not added together. Simple interest = P × R × T ÷ 100; compound amount = P(1 + R/100)^n. Straight-line depreciation = (cost − scrap) ÷ life; written-down value applies a fixed rate to book value each year.
Worked example
FC = ₹50,000; SP = ₹20; VC = ₹12. Contribution = ₹8 per unit; P/V ratio = 40%. BEP = 50,000 ÷ 8 = 6,250 units, i.e. ₹1,25,000 of sales. At 10,000 units, sales = ₹2,00,000, contribution = ₹80,000, profit = ₹30,000. MoS = 10,000 − 6,250 = 3,750 units or ₹75,000; check: 75,000 × 40% = ₹30,000.
Traps
- Dividing fixed cost by selling price instead of contribution per unit.
- Including fixed cost inside contribution.
- Mixing the unit BEP formula with the rupee sales formula.
- Adding successive discounts instead of applying each to the reduced price.
- Using simple interest when compounding is required, or charging depreciation on original cost under the WDV method.