Business Arithmetic

About this unit

Numbers tell an entrepreneur whether the business is really working. This unit teaches the basic calculations every small business owner needs: unit of sale, unit price and unit cost; the break-even point; working capital requirements; inventory control through economic order quantity; and measures of return such as return on investment and return on equity. These tools help in pricing, planning production, managing cash and judging performance.

Key ideas

• Unit cost = total cost ÷ number of units.
• Contribution per unit = selling price − variable cost per unit.
• Break-even point (units) = fixed costs ÷ contribution per unit.
• Net working capital = current assets − current liabilities.
• EOQ = √(2AO ÷ C), where A is annual demand, O is ordering cost per order and C is carrying cost per unit per year.
• ROI = net profit ÷ total investment × 100; ROE = net profit ÷ shareholders' equity × 100.

How to prepare

• Memorise each formula with the meaning of every symbol, and practise at least five numericals for each.
• Always check units: rupees, units, days or per cent.
• Watch for traps such as using selling price instead of contribution in the break-even formula.