Test: Business Arithmetic- 2 - Commerce MCQ

Production Cycle: The production cycle is comprised of all activities related to the conversion of raw materials into finished goods. The cycle has several distinct components, involving the design of products, their incorporation into a production schedule, manufacturing activities, and a cost accounting feedback loop.
For example, the production cycle for the windows manufacturing enterprise would be much shorter, than for the automobile manufacturers.

Return on Investment (ROI) Formula:

• First method:
  
• Second method:
  

Correct Formula Match:

Correct Match:

• Variable costs may include Commission on sales, credit card fees, wages of part-time staff, etc.
• Fixed costs may include Depreciation, interest paid on capital, rent, salary, property taxes, insurance premium, etc.

• Gross profit margin shows the percentage of revenue that exceeds a company's costs of goods sold.
• Gross profit margin is calculated by subtracting the cost of goods sold from total revenue for the period and dividing that number by revenue.

Sales mix is the proportion in which two or more products are sold.
For the calculation of break-even point for sales mix, following assumptions are made in addition to those already made for CVP analysis:

• The proportion of sales mix must be predetermined.
• The sales mix must not change within the relevant time period.

The calculation method for the break-even point of sales mix is based on the contribution approach method. Since we have multiple products in sales mix therefore it is most likely that we will be dealing with products with different contribution margin per unit and contribution margin ratios. This problem is overcome by calculating weighted average contribution margin per unit and contribution margin ratio. These are then used to calculate the break-even point for sales mix.

It is said that working capital is the lifeblood of a business. Every business needs funds in order to run its day-to-day activities.
The importance of working capital can be better understood by the following: Without adequate working capital an entity cannot meet its short-term liabilities in time.

The cash operating cycle (also known as the working capital cycle or the cash conversion cycle) is the number of days between paying suppliers and receiving cash from sales.
Cash operating cycle = Inventory days + Receivables days – Payables days.

Current liabilities are a company's short-term financial obligations that are due within one year or within a normal operating cycle. An operating cycle, also referred to as the cash conversion cycle, is the time it takes a company to purchase inventory and convert it to cash from sales.

• The cash conversion cycle (CCC) is a formula in management accounting that measures how efficiently a company's managers are managing its working capital.
• The CCC measures the length of time between a company's purchase of inventory and the receipts of cash from its accounts receivable.

Gross working capital is the sum total of all the current assets of a company, whereas net working capital is the difference between the current assets and the current liabilities of a company.

• Longer the operating cycle time, the more is the working capital required. Thus, it follows that depending upon the length of working cycle, the requirement for working capital varies from enterprise to enterprise.
• Operating cycle is an important concept in management of cash and management of working capital.
• The operating cycle reveals the time that elapses between outlay of cash and inflow of cash.
• Quicker the operating cycle less amount of investment in working capital is needed and it improves the profitability.

Inventory usage is how much inventory a business has used over a specific time frame. It's similar to COGS, but it speaks to the number of units sold and not their monetary value. It's also called inventory consumption. That's called the inventory usage rate.

• Return on investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments.
• ROI tries to directly measure the amount of return on a particular investment, relative to the investment's cost.
• A low Return on Investment Ratio (ROI) indicates Improper utilization of resources and Over investment in assets.

A lead time is the latency between the initiation and completion of a process.
For example, the lead time between the placement of an order and delivery of new cars by a given manufacturer might be between 2 weeks and 6 months, depending on various particularities.

Reorder point = Average daily usage rate × Lead time in days.
Multiply the maximum number of daily orders by the maximum lead time that may be required in case of supplier delays. Multiply the average number of daily orders by the average lead time. Subtract the result of Step 2 from the result of Step 1.

Return on equity ratio can be described as a financial ratio that helps measure a company's proficiency to generate profits from its shareholders' investments. This profitability helps to gauge a company's effectiveness when it comes to using equity funding to run its daily operations.