3.1.5 · 35–55 minutes · investigate, calculate, discuss, review
What you will learn
- Calculate contribution, profit and break-even.
- Identify uncertain inputs with high decision impact.
- Distinguish shock size from probability.
3.1 · The Investment Case
The Investment Case
The Investment Case · the work you will do
- 1Check the evidence
- 2Build the opposing case
- 3Test what matters
- 4Reach a judgement
Before you begin
DailyCup’s base profit is £50,000. If transactions fall 10%, does profit also fall 10%? And does that scenario have a 10% chance of happening?
Record your first answer before continuing.
Video coming soon · about 3 minutes
Test the Numbers
Use the narration below while the recording is being made, then try the decisions in this lesson.
Read the full narration
Welcome to On Judgement. DailyCup’s base profit is £50,000. If transactions fall 10%, does profit also fall 10%? And does that scenario have a 10% chance of happening? Take a first view. You can change it when you have considered the evidence.
List price, units, variable cost and fixed costs separately. Check units and the period. Label historical observations, teaching assumptions and forecasts. Correct arithmetic does not validate the input assumptions. A model is useful because it makes the chain explicit and repeatable, not because a spreadsheet makes its conclusion objective. Keep a source or rationale beside each important input.
Change one input while holding the others fixed to understand its influence. Contribution per transaction equals price less variable cost. Operating profit equals total contribution less the fixed-cost assumption. Break-even units divide fixed costs by positive unit contribution. This simple model omits tax, financing and cash timing; do not call its result free cash flow or a complete company valuation.
A demand shock can coincide with a cost increase. Compute the combined case rather than adding percentage effects on profit mechanically. Explain why the shocks might occur together and whether management could respond. A scenario describes assumptions; a probability requires a separate basis. A 10% unit decline does not imply a 10% likelihood or a 10% profit decline.
Prioritise inputs that are both uncertain and material to the action. An inexpensive check can be valuable if it might change the decision; another decimal on an immaterial assumption may not. Consider the cost and delay of further information. A useful recommendation says what evidence to seek next and why its result could alter the case.
Let's work through DailyCup sensitivity ladder. Base units 100,000; price £5; variable cost £3/unit; fixed costs £150,000. Compare units 90,000; variable cost £3.30 at base volume; then both together. Hold other factors constant. Pause here and try the calculation or reasoning before continuing.
Base profit=100,000×(5−3)−150,000=£50,000. Volume downside profit=90,000×2−150,000=£30,000, a 40% fall. Cost downside profit=100,000×1.70−150,000=£20,000. Combined profit=90,000×1.70−150,000=£3,000. Base break-even=150,000/2=75,000 transactions.
A small-looking demand/cost change can matter greatly when fixed costs are large relative to contribution. None of these calculations establishes scenario probabilities.
Now try the choices in this lesson. If your answer changes, identify the reason. Distinguish shock size from probability. Use the case activities to put the idea into your own words, and return to the evidence when more than one conclusion is defensible.
Make assumptions visible
List price, units, variable cost and fixed costs separately. Check units and the period. Label historical observations, teaching assumptions and forecasts. Correct arithmetic does not validate the input assumptions. A model is useful because it makes the chain explicit and repeatable, not because a spreadsheet makes its conclusion objective. Keep a source or rationale beside each important input.
Test one driver first
Change one input while holding the others fixed to understand its influence. Contribution per transaction equals price less variable cost. Operating profit equals total contribution less the fixed-cost assumption. Break-even units divide fixed costs by positive unit contribution. This simple model omits tax, financing and cash timing; do not call its result free cash flow or a complete company valuation.
Then combine a coherent stress
A demand shock can coincide with a cost increase. Compute the combined case rather than adding percentage effects on profit mechanically. Explain why the shocks might occur together and whether management could respond. A scenario describes assumptions; a probability requires a separate basis. A 10% unit decline does not imply a 10% likelihood or a 10% profit decline.
Research the decisive uncertainty
Prioritise inputs that are both uncertain and material to the action. An inexpensive check can be valuable if it might change the decision; another decimal on an immaterial assumption may not. Consider the cost and delay of further information. A useful recommendation says what evidence to seek next and why its result could alter the case.
DailyCup sensitivity ladder
Test the downside before defending the case
Why is the combined outcome more informative than listing risks without working the numbers?
Base units 100,000; price £5; variable cost £3/unit; fixed costs £150,000. Compare units 90,000; variable cost £3.30 at base volume; then both together. Hold other factors constant.
- Base profit=100,000×(5−3)−150,000=£50,000.
- Volume downside profit=90,000×2−150,000=£30,000, a 40% fall.
- Cost downside profit=100,000×1.70−150,000=£20,000.
- Combined profit=90,000×1.70−150,000=£3,000.
- Base break-even=150,000/2=75,000 transactions.
A small-looking demand/cost change can matter greatly when fixed costs are large relative to contribution. None of these calculations establishes scenario probabilities.
Put it into practice
1. Find the threshold
At unchanged 100,000 units and £150,000 fixed costs, what unit variable cost leaves zero profit at price £5?
Write your response in your workbook before opening feedback.
Compare with a model response
Contribution must be £1.50 per unit, so variable cost £3.50. Check whether the cost estimate is close enough to that threshold to affect the decision.
2. Choose the research
You can check either a material supplier-cost renewal or an immaterial stationery estimate. Explain how to prioritise.
Write your response in your workbook before opening feedback.
Compare with a model response
Compare uncertainty, potential profit/cash effect, decision sensitivity, cost and speed of verification. A material cost-renewal check is likely more valuable under this case, but state assumptions.
3. Write a scenario note
Explain the difference between a 10% fall in units and a 10% probability of a fall.
Write your response in your workbook before opening feedback.
Compare with a model response
One is the size of a conditional change; the other expresses uncertainty about an event. Supply evidence before assigning probabilities. Do not convert a scenario label into a measured likelihood.
Jargon buster
Break-even
The activity level at which the specified profit is zero.
Sensitivity
The output change from a specified input variation.
Scenario
A conditional combination of assumptions.
Probability
A stated measure of uncertainty with a defined event and basis.
Threshold
A level at which the decision or outcome condition changes.
Information value
The usefulness of evidence for improving a decision relative to its cost and delay.
Knowledge check
Make each choice on the page. Feedback explains the reasoning. Use Try again after revisiting an idea.
AQA connection and further reading
AQA 7138: AO 2 application, AO 3 analysis and AO 4 evaluation (4.2), with command-word practice (4.4). Case connections include 3.1.4 finance, 3.3.3 strategy and 3.3.4 uncertainty. These original investing tasks and rubrics are not official AQA questions or mark schemes.
AQA 7138 specification
Primary curriculum reference; links and original classroom rubrics are interpretive, not endorsement.
Take forward
Calculate contribution, profit and break-even. Identify uncertain inputs with high decision impact. Distinguish shock size from probability.