Finance & Accounting Ratios
⏱ ~3-min readAceMark Guide
What this topic is really about
The return on capital employed (ROCE) is calculated by dividing operating profit by capital employed and multiplying by 100.. Return on capital employed expresses operating profit as a percentage of the capital employed in the business, measuring how efficiently funds generate profit.
The gross profit margin is calculated by dividing gross profit by revenue and expressing it as a percentage.. Gross profit margin is gross profit divided by revenue, expressed as a percentage.
See the mechanism
Contribution per unit is £40 minus £25, which equals £15. A diagram for this topic isn't available yet — the worked example below walks the same reasoning step by step.
An exam-style question, fully explained
A firm sells a product for £40. Variable costs are £25 per unit and fixed costs are £60,000. How many units must it sell to break even?
- Identify what the question tests: A firm sells a product for £40..
- Contribution per unit is £40 minus £25, which equals £15.
- Dividing fixed costs of £60,000 by the £15 contribution gives 4,000 units needed to break even.
Traps the examiner sets
- Some students may incorrectly calculate the ratio or misinterpret its meaning, such as thinking a lower ratio is always better. However, a very low ratio may indicate liquidity problems, while a very high ratio may indicate inefficient use of assets.
- Some students may confuse gross profit margin with other financial ratios, such as net profit margin or operating profit margin, which have different calculations and meanings. Others may forget to multiply by 100 to convert the result to a percentage.
- Many students confuse ROCE with other profitability ratios, such as return on sales or net profit margin, which use different formulas and have different purposes. Others may mistakenly use gross profit or net profit instead of operating profit in the ROCE calculation.
- Many students confuse contribution with profit, which also takes into account fixed costs. Others may incorrectly calculate the contribution per unit or fail to multiply it by the total number of units sold.
- Some students may get confused and calculate the net profit as a percentage of a different figure, or misunderstand the net profit margin as a fixed amount rather than a percentage. Others may simply misapply the formula by not converting the percentage to a decimal before multiplying by the revenue.
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