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Topic 3: Decision Making for a Business

4 dot points, in syllabus order. Each dot point has a focused answer, with exam-style questions and worked answers where available.

Which costs actually matter when choosing between business options?

Identify relevant costs and apply them to short-term decisions such as special orders and make-or-buy

Relevant costs are future costs that differ between options; sunk costs and unavoidable fixed costs are irrelevant. Applying this to special orders and make-or-buy choices isolates the figures that change the decision.

6 min read →

Why can a profitable business run out of cash and how is the difference reconciled?

Explain and reconcile the difference between profit and cash flow to manage the financial sustainability of a business

Profit is measured on the accrual basis; cash flow records actual movement of money. Non-cash items, credit transactions, asset purchases, loans and drawings cause the two to differ, which is why a profitable business can still be short of cash.

6 min read →

How many units must a business sell to break even and reach a target profit?

Apply cost-volume-profit analysis to calculate the break-even point and inform pricing and output decisions

Cost-volume-profit analysis separates fixed and variable costs to find the break-even point and the sales needed for a target profit, supporting pricing and output decisions.

8 min read →

How do budgets and cash flow forecasts help a business plan and stay solvent?

Prepare and use budgets, especially the cash budget, to plan, control and make decisions for a business

A budget is a financial plan. The cash budget forecasts receipts and payments to predict shortfalls and surpluses, helping a business stay solvent and make planning decisions.

8 min read →