Model Answers Series 2 2011 (3003)

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LCCI International Qualifications

Advanced Business Calculations Level 3

3003/2/11/MA Page 1 of 13

Advanced Business Calculations Level 3 Series 2 2011

How to use this booklet

Model Answers have been developed by EDI to offer additional information and guidance to Centres, teachers and candidates as they prepare for LCCI International Qualifications. The contents of this booklet are divided into 3 elements:

(1) Questions – reproduced from the printed examination paper (2) Model Answers – summary of the main points that the Chief Examiner expected to

see in the answers to each question in the examination paper, plus a fully worked example or sample answer (where applicable)

(3) Helpful Hints – where appropriate, additional guidance relating to individual

questions or to examination technique Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success. EDI provides Model Answers to help candidates gain a general understanding of the standard required. The general standard of model answers is one that would achieve a Distinction grade. EDI accepts that candidates may offer other answers that could be equally valid.

© Education Development International plc 2011 All rights reserved; no part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without prior written permission of the Publisher. The book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover, other than that in which it is published, without the prior consent of the Publisher.

3003/2/11/MA Page 2 of 13

QUESTION 1 (a) (i) Calculate the principal that will earn a total of £2,535 in 4 years at 3¼% simple interest per annum.

(2 marks) (ii) Calculate the amount of interest earned in the first year.

(2 marks) (b) Calculate the principal that will earn a total of £2,535 in 4 years at 3¼% compound interest per annum. Give your answer correct to the nearest pound.

(4 marks) (c) An investment account of £59,000 attracts 3.55% compound interest per annum. How much will be in the account after 3 years if the interest is compounded six-monthly? Take the six-monthly rate as half of the annual rate.

(4 marks)

(Total 12 marks)

MODEL ANSWER TO QUESTION 1 Syllabus Topic 1: Simple and compound interest (1.2) and (1.3) (a) (i) P = 100I M1 RT P = 100 x £2,535 = £19,500 A1 3.25 x 4 (ii) Interest = £19,500 x 3.25% = £633.75 M1 A1 (b) (1 + 0.0325)4 = 1.13647593 M1 Of which 1.13647593 – 1 = 0.13647593 represents the interest M1 Principal = £2,535 / 0.13647593 = £18,575 M1 A1 (c) Number of time periods = 2 x 3 = 6 M1 Interest per time period = 3.55% ÷ 2 = 1.775% M1 A = £59,000 x (1 + 0.01775)6 = £59,000 x 1.017756 = £65,569.02. M1 A1

(Total 12 marks)

3003/2/11/MA Page 3 of 13

QUESTION 2 (a) Annette bought 3½% government stock at £87 per £100 nominal value.

She invested £34,800 in the stock, and held it for a period during which she received interest of £5,600 in total for the period.

Calculate:

(i) the nominal value of the stock purchased (2 marks)

(ii) the number of years for which she held the stock (2 marks)

(iii) the percentage yield on the amount invested for the period. (2 marks)

(b) Annette invested a further £34,800 in a unit trust with an offer price of £43.50 per unit, and sold the units after 4 years at £52.20 per unit. Calculate:

(i) the number of units purchased (2 marks)

(ii) the increase in value of the units after 4 years.

(2 marks) (c) Compare the increase in value of the units, expressed as a percentage increase per annum, with the yield on the government stock, also expressed as a percentage per annum:

(3 marks)

(Total 13 marks) MODEL ANSWER TO QUESTION 2 Syllabus Topic 2: Stock exchanges (2.4) and (2.5) (a) (i) Nominal value of stock = £34,800 / 0.87 = £40,000 M1 A1 (ii) Number of years = £5,600 / (£40,000 x 0.035) = 4 years M1 A1 (iii) Percentage yield = £5,600 / £34,800 = 0.16 = 16% M1 A1 (b) (i) Number of units = £34,800 / £43.50 = 800 M1 A1 (ii) Increase in value = (800 x £52.20) - £34,800 = £6,960 M1 A1 (c) Yield on stock per annum = 16% / 4 = 4% M1 Percentage increase in units = £6,960 / (£34,800 x 4) = 0.05 = 5% per annum M1 The increase in units is 1% per annum higher A1

(Total 13 marks)

3003/2/11/MA Page 4 of 13

QUESTION 3 (a) In a particular period, manufacturer M makes and sells 109,000 units of product P. It sells product P at a selling price of £29.50, and makes a profit of £204,750. It has variable costs of £19 per unit of product.

Calculate the break-even point in units per period. (4 marks)

(b) Manufacturer M sells product Q at £45 per unit of product.

Manufacturing costs are as follows:

Fixed cost per period £1,982,500 Variable cost per unit of product £32

Calculate:

(i) the profit or loss at an output of 150,000 units per period

(3 marks) (ii) the break-even point in units per period.

(2 marks)

(c) Manufacturer M also produces product R.

Product R has unit costs of production during a period as follows: £

Components 24.40 Labour 7.75 Production overheads 15.00 Distribution expenses 3.20

Additional Information 1 The cost of components varies directly with the number of units produced 2 80% of the labour costs vary directly with the number of units produced 3 The production overheads do not vary irrespective of how many units are produced 4 65% of the distribution expenses vary directly with the number of units produced 5 The rest of these expenses remain fixed.

Calculate:

(i) the variable cost per unit (2 marks)

(ii) the variable cost as a percentage of the total cost for the period shown.

(2 marks)

(Total 13 marks)

3003/2/11/MA Page 5 of 13

MODEL ANSWER TO QUESTION 3 Syllabus Topic 3: Business ownership (3.2) and (3.3) (a) Contribution per unit = £29.50 - £19.00 = £10.50 M1 Excess of sales above break-even = £204,750 / £10.50 = 19,500 M1 Break-even = 109,000 – 19,500 = 89,500 units per period M1 A1 (b) (i) Contribution = £45 - £32 = £13 M1 Profit (loss) = (150,000 x £13) - £1,982,500 = -£32,500 (loss) M1 A1 (ii) Break-even = £1,982,500 / £13 = 152,500 units per period M1 A1 (c) (i) Variable cost per unit = £24.40 + (0.8 x £7.75) + (0.65 x £3.20) = £32.68 M1 A1 (ii) Total cost per unit = £24.40 + £7.75 + £15.00 + £3.20 = £50.35 M1 Variable cost as a percentage = 100% x £32.68 / £50.35 = 64.9% A1

(Total 13 marks)

3003/2/11/MA Page 6 of 13

QUESTION 4 (a) At the end of the year 2010 the following information applied to company C:

Current liabilities £4,450,000 Current ratio 2.6 Acid test ratio 1.4

Calculate:

(i) the current assets (2 marks)

(ii) the stock held by company C at that time (2 marks)

(iii) State whether you think the liquidity of company C is healthy or not. (1 mark)

(b) During 2010 the following information relates to a trader T.

£ Net sales 805,000 Cost of goods sold 540,000 Initial stock value 25,600 Final stock value 24,400 Overhead expenses 112,000

Calculate:

(i) gross profit (2 marks)

(ii) net profit (2 marks)

(iii) net purchases (2 marks)

(iv) the rate of stockturn (stock turnover per annum). (3 marks)

(Total 14 marks)

3003/2/11/MA Page 7 of 13

MODEL ANSWER TO QUESTION 4 Syllabus Topic 4: Profitability and liquidity (4.2) and (4.3) (a) (i) Current assets = 2.6 x £4,450,000 = £11,570,000 M1 A1 (ii) Stock held = (2.6 – 1.4) x £4,450,000 = £5,340,000 M1 A1 (iii) Yes. A1 (b) (i) Gross profit = Net sales – COGS = £805,000 – £540,000 = £265,000 M1 A1 (ii) Net profit = Gross profit – overhead expenses M1 = £265,000 – £112,000 = £153,000 A1 (iii) Net purchases = COGS – initial stock + final stock M1 = £540,000 – £25,600 + £24,400 = £538,800 A1 (iv) Average stock = ½(£25,600 + £24,400) = £25,000 M1 Rate of stockturn = COGS / Average stock M1 = £540,000 / £25,000 = 21.6 A1

(Total 14 marks)

3003/2/11/MA Page 8 of 13

QUESTION 5 (a) A business owner has a choice of two investment projects.

The estimated life of each project is 5 years.

Further information is as follows: (all figures estimated and in £)

Project One Project Two Initial cost 320,000 280,000 Repair and maintenance costs per annum 25,000 15,000 Revenue returns before taking account of repair and maintenance cost Year 1 30,000 40,000 Year 2 60,000 80,000 Year 3 100,000 80,000 Year 4 100,000 80,000 Year 5 75,000 75,000 Use the average rate of return method of investment appraisal to advise which project is the

better investment. (7 marks)

(b) The owner estimates the following figures for Investment Project Three. £ Cost (year 0) 2,247,500 Year 1 Net cash inflow 500,000 Year 2 Net cash inflow 750,000 Year 3 Net cash inflow 750,000 Year 4 Net cash inflow 750,000

The owner calculates the net present value using a discount rate of 8.1% and the following table:

Discount rate Discount 8.1% factors Year 1 0.925 Year 2 0.856 Year 3 0.792 Year 4 0.732

(i) Calculate the net present value of Project Three on the basis of the figures given (4 marks)

(ii) Estimate the internal rate of return of Project Three.

(1 mark)

(Total 12 marks)

3003/2/11/MA Page 9 of 13

MODEL ANSWER TO QUESTION 5 Syllabus Topic 5: Investment appraisal (5.3), (5.4), (5.5) and (5.6) (a) Project One Project Two Initial cost 320,000 280,000 Total revenue returns 365,000 355,000 M1 Average returns per annum 73,000 71,000 M1 Average returns net of repairs and maintenance 48,000 56,000 M1 Average rate of return 48,000 56,000 320,000 280,000 M1 = 15% = 20% A1 A1 By the average rate of return method of investment appraisal, Project Two is the preferred investment. A1 (b) (i) £ Discount factor Present value (£)

Cost (year 0) (2,247,500) 1.0 (2,247,500) M1 Year 1 Net cash inflow 500,000 0.925 462,500 M1 Year 2 Net cash inflow 750,000 0.856 642,000 Year 3 Net cash inflow 750,000 0.792 594,000 Year 4 Net cash inflow 750,000 0.732 549,000 Net present value = Nil M1 A1 (ii) Estimated internal rate of return = 8.1% A1

(Total 12 marks)

3003/2/11/MA Page 10 of 13

QUESTION 6 (a) A bankrupt trader owed £39,175 to fully secured creditors and £205,000 to unsecured creditors.

The assets of the business realised £138,600.

(i) Express the business assets as a percentage of the liabilities (2 marks)

(ii) State how much will be paid to the secured creditors (1 mark)

(iii) Calculate how much in the £ will be paid to the unsecured creditors. (3 marks)

(b) In another bankruptcy, 33.5 pence in the £ was paid to unsecured creditors. John was owed £24,000. Calculate:

(i) how much John was paid if he was an unsecured creditor (2 marks)

(ii) how much John was paid if £10,000 of what he was owed was secured against assets.

(3 marks)

(Total 11 marks) MODEL ANSWER TO QUESTION 6 Syllabus Topic 6: Bankruptcy (6.2), (6.3) and (6.4) (a) (i) Assets / liabilities = £138,600 / (£39,175 + £205,000) = 0.568 = 57% M1 A1 (ii) Secured creditors received £39,175 A1 (iii) Available for unsecured creditors = £138,600 - £39,175 = £99,425 M1 Rate paid to unsecured creditors = £1 x £99,425 / £205,000 = 48.5p M1 A1 (b) (i) As an unsecured creditor, John received 0.335 x £24,000 = £8,040 M1 A1 (ii) Unsecured debt = £24,000 - £10,000 = £14,000 M1 Paid to John on unsecured debt = 0.335 x £14,000 = £4,690 M1 Total paid to John = £10,000 + £4,690 = £14,690 A1

(Total 11 marks)

3003/2/11 Page 11 of 13

QUESTION 7 A factory machine that cost £8,500,000 is depreciated by 40% of its value each year using the diminishing balance method. (a) Calculate:

(i) the depreciation that occurs during the first year (2 marks)

(ii) the book value at the end of the first year (2 marks)

(iii) the book value at the end of the second year (2 marks)

(iv) the depreciation that occurs during the third year. (2 marks)

(b) Given that the book value at the end of year 4 is £1,101,600, prepare a depreciation schedule for

years 5 and 6 that shows, for each year, the yearly depreciation, the accumulated depreciation and the book value at the end of the year.

(5 marks)

(Total 13 marks)

3003/2/11/MA Page 12 of 13

MODEL ANSWER TO QUESTION 7 (Syllabus Topic 7: Depreciation of Business Assets (7.3) (a) (i) Depreciation in year 1 = 40% x £8,500,000 = £3,400,000 M1 A1 (ii) Book value at the end of year 1 = (1 – 0.4) x £8,500,000 = £5,100,000 M1 A1 (iii) Book value at the end of year 2 = 0.6 x 0.6 x £8,500,000 = £3,060,000 M1 A1 (iv) Depreciation during year 3 = 0.4 x £3,060,000 = £1,224,000 M1 A1 (b) Schedule of depreciation (all figures in £): Year Annual Cumulative Book value at Depreciation Depreciation end of year

4 1,101,600 A1 5 440,640 7,839,040 660,960 6 264,384 8,103,424 396,576

M1 M1 M1 A1

(Total 13 marks) QUESTION 8 Company D sells Product S with the following prices and sales Year 2007 2008 2009 2010 Price (£) 24.00 25.00 22.50 18.00 Sales (quantity) 150,000 120,000 165,000 202,500 (a) Calculate:

(i) the price relative for Product S for year 2010 with year 2009 as the base year (2 marks)

(ii) the chain base index of prices for Product S for the years 2007 to 2010 (3 marks)

(iii) an index for the sales (quantity) of Product S for the years 2007 to 2010 with year 2007 as the base year.

(4 marks) The quantity relative for Product S for year 2007 with year 2006 as the base year was 1.25, while the price decreased by £2.50 from year 2006 to year 2007. (b) Calculate the increase in total income from the sales of Product S in year 2007 as a percentage of the total income from sales of Product S in year 2006.

(3 marks)

(Total 12 marks)

3003/2/11/MA Page 13 of 13 © Education Development International plc 2011

MODEL ANSWER TO QUESTION 8 Syllabus Topic 8: Index numbers (8.2), (8.3) and (8.4) (a) (i) Price relative = £18.00 / £22.50 = 0.8 M1 A1 (ii) Chain base index: Year 2007 2008 2009 2010 Index 100 104 90 80 A1 A1 A1 (iii) Example calculation, for year 2009: Index = 100 x 165,000 / 150,000 = 110 M1 Year 2007 2008 2009 2010 Index 100 80 110 135 A1 A1 A1 (b) Price in 2006 = £24 + £2.50 = £26.50 M1 Relative for sales = 1.25 x (£24.00 / £26.50) = 1.132 M1 Percentage increase = 13.2% A1

(Total 12 marks)

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