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Advanced Business Calculations Level 3

Model Answers

Series 4 2009 (3003)

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Page 1 of 9 . without the prior consent of the Publisher. no part of this publication may be reproduced. other than that in which it is published. recording or otherwise without prior written permission of the Publisher. © Education Development International plc 2009 All rights reserved. hired out or otherwise disposed of by way of trade in any form of binding or cover. resold.Advanced Business Calculations Level 3 Series 4 2009 How to use this booklet Model Answers have been developed by EDI to offer additional information and guidance to Centres. The contents of this booklet are divided into 3 elements: (1) (2) Questions Model Answers – reproduced from the printed examination paper – summary of the main points that the Chief Examiner expected to see in the answers to each question in the examination paper. photocopying. electronic. stored in a retrieval system or transmitted in any form or by any means. teachers and candidates as they prepare for LCCI International Qualifications. mechanical. additional guidance relating to individual questions or to examination technique (3) Helpful Hints Teachers and candidates should find this booklet an invaluable teaching tool and an aid to success. EDI accepts that candidates may offer other answers that could be equally valid. plus a fully worked example or sample answer (where applicable) – where appropriate. The general standard of model answers is one that would achieve a Distinction grade. EDI provides Model Answers to help candidates gain a general understanding of the standard required. The book may not be lent.

937.1% per annum for 3 years.137.037.85% per annum compound interest. At the end of the period. (c) Calculate the sum initially invested. (3 marks) (d) Calculate the rate of simple interest that would give the same interest on this initial amount over 3 years.QUESTION 1 Natalia deposits £45.000 x (1.637.137.000 in another account at 2.2% 3 3003/4/09/MA Page 2 of 9 .15 Less than simple interest by: £3.25 years Interest = PRT/100 = £45. (b) How much less interest will Natalia have earned from this account than from the simple interest account? (5 marks) Natalia invests a further amount at compound interest of 3.60 Rate of simple interest = 100 x £2. (a) How much interest will Natalia have earned after 2 years and 3 months? (3 marks) Natalia deposits a further £45.937.637. the amount (principle plus interest) is £30.500 = £2. also for a period of 2 years and 3 months. (3 marks) (Total 14 marks) MODEL ANSWER TO QUESTION 1 (a) 2 years + 3 months = 2.0285) 2.25 x 3 / 100 = £3. Interest is added annually and at the end of the period.000 = £2.15 = £100.937.25 Number of years = £47.000 in a bank account at 3% per annum simple interest.15 Interest = £47.937.60 / (3 x £27.£2.60.50 .500) = 3. and is calculated as compound interest throughout.60 .031) = £27.35 (c) Initial investment = £30.500 (d) Interest = £30.000 x 2.60 / (1 + 0.£27.037.137.50 (b) Amount = Principle x (1 + percentage rate) Amount = £45.15 – £45.

(b) Calculate the total cost of the units including initial charge. plus an initial charge of 5%.200 = £21. and the total value of the units was £215. This income was not reinvested in units.200 x £69 = £151.800 + £6.800 Total = £14. and sold the units after 5 years at £162 per unit.QUESTION 2 Andy buys unit trusts and invests for income.£69) / (£69 x 5) = 4.220 / 2. 5 years later.532 = £85 Increase per annum in unit price = 100% x (£85 .4% (b) Cost of units before charge = 2. (3 marks) Beatrice invested her income from the units in purchasing more of the same units. She bought 2.200 units at a price per unit of £69. Beatrice buys unit trusts and invests for growth.000 in a unit trust with an offer price of £125 per unit.084 = 8.£125) = £14. During this period he received income from the units of £6.390 (c) (i) (ii) Price per unit = £215.000 / (£50.200. (2 marks) (2 marks) (Total 14 marks) MODEL ANSWER TO QUESTION 2 (a) (i) (ii) Number of units purchased = £50. (a) Calculate (i) (ii) the number of units purchased the excess of income over expenditure (2 marks) (3 marks) (2 marks) (iii) the percentage yield per annum represented by this figure. (c) Calculate (i) (ii) the price per unit at this time the percentage increase per annum in the price per unit.532. He invested £50.05 x £151. the number of units had grown to 2.000 (iii) Yield per annum = £21.6% 3003/4/09/MA Page 3 of 9 .000 / £125 = 400 Increase in value = 400 x (£162 .800 Total cost = 1.800 = £159.000 x 5) = 0.220.

(a) Calculate the percentage of distribution expenses that vary directly with the number of units produced.000 per period. (2 marks) (Total 13 marks) MODEL ANSWER TO QUESTION 3 (a) Variable labour costs per unit = 60% x £80 = £48 Variable distribution costs per unit = £150 – (£57 + £48) = £45 Variable distribution costs percent = 100% x £45/£60 = 75% (b) Fixed costs per unit = £57 + £80 + £75 + £60 .QUESTION 3 Product P has variable costs per unit of product of £150.50 per unit (e) Total cost of production at break even = (12.50 Selling price = Variable cost + contribution = £150 + £152.000 units (d) Contribution per unit = £1. (2 marks) Product P breaks even on production and sales of 12.800 = £152.000/£122 = 16.872. 60% of the labour costs vary directly with the number of units produced.800 units per period.952.000 3003/4/09/MA Page 4 of 9 .952.000 = £3. (d) Calculate the selling price of product P. The production overheads do not vary irrespective of how many units are produced.50 = £302.000/12. (4 marks) (b) Calculate the fixed costs per unit. Unit costs of production during a trading period are as follows: £ 57 80 75 60 Components Labour Production overheads Distribution expenses The cost of components varies directly with the number of units produced.£150 = £122 (c) Number of units produced = £1. (3 marks) (e) Calculate the total cost of production at break even.952.952. and fixed costs of £1. (2 marks) (c) Calculate the number of units produced in the trading period.800 x £150) + £1.

200. and the net purchases during the year were £138. (c) The acid test ratio is above the recommended ratio of 1.740 (iii) Rate of stockturn = CoGS = £136.£12.260 – (£12.750 + £138.35 current liabilities £17.040 + £10. (1 mark) (c) Give a reason for your answer to (b). (d) Calculate: (i) (ii) the average stock held the cost of goods sold (2 marks) (2 marks) (2 marks) (Total 13 marks) (iii) the rate of stockturn. MODEL ANSWER TO QUESTION 4 (a) (i) (ii) Amount owed by debtors = £35.740 = 12 times average stock £11.750.988 Current assets – stock = (£35. the liquidity is healthy.QUESTION 4 A retailer’s balance sheet at the end of a trading year shows current assets of £35.220 Acid test ratio = Current assets – stock = £23.040) = £23.040 + £7.395 Cost of goods sold (CoGS) = stock at start + net purchases . (a) Calculate: (i) (ii) the amount owed by debtors the acid test ratio.040.030 .260 and current liabilities of £17.200 (b) Yes. bank account of £7.395 3003/4/09/MA Page 5 of 9 .£12. cash of £532 and an amount owed by debtors.750) = £11.040 = £136.700 + £532) = £14. The business can pay its liabilities without selling stock.220 = 1.700. (d) (i) (ii) Average stock held = ½ x (£12.260 .stock at end = £10.030. (1 mark) The stock held at the start of the trading year was £10. The current assets include stock of £12. (2 marks) (3 marks) (b) State whether or not you would judge the liquidity of the business to be healthy.

(3 marks) (Total 11 marks) MODEL ANSWER TO QUESTION 5 (a) Present value of revenue = £150.400 . (e) Calculate the internal rate of return of the project.812 0.731 0.500 . (2 marks) (d) Explain what the net present value calculated in (a) represents.000 per annum for 5 years.901 0.400 Net present value of project = £554.£4.3% £18. (c) Discount rate is given by (1 / 0.500. (1 mark) (c) Calculate the discount rate used.901) = 1.812 + 0.659 + 0.500 – 10% x £4.696 = £554.000 = £4.659 0. (1 mark) At a discount rate of 10% the project has a net present value of £18.000 and an estimated revenue return of £150. (4 marks) (b) Advise Colin whether the project is a worthwhile investment at the discount rate used.593 Year 1 Year 2 Year 3 Year 4 Year 5 (a) Calculate the net present value of the project. He uses the following table of discounting factors: Discounting factor 0.11 – 1 = 0.901 + 0.593) = £150.400 = 11.11 Discount rate = 1. (e) Internal rate of return = 11% x £18.000 x 3.QUESTION 5 Colin is considering whether to invest in an investment project with an initial cost of £550.£550.400 (b) The project is a worthwhile investment.731 + 0.400 3003/4/09/MA Page 6 of 9 .11 = 11% (d) The positive net present value in (a) means that the project is expected to earn more than 11%.000 x (0.

000 60% (iii) the amount owed and paid to secured creditors.900 £95.086.000 – 39.205 / £5.002.000 = £23.791 £53.500.900 + S = (95.586.000 (2 marks) (2 marks) (3 marks) £39.072.000 = £0.000 + S) = 0.6) = £42.6 = 57.000 + S) x 0.586.900 / £95.205 Owed to unsecured creditor C = £1.000 = 0.055 3003/4/09/MA Page 7 of 9 .42 Paid to unsecured creditor who is owed £11.QUESTION 6 The following information relates to bankruptcy A: Available for unsecured creditors Owed to unsecured creditors Total assets as a percentage of total liabilities (a) Calculate: (i) (ii) the rate in the pound paid to unsecured creditors the amount paid to an unsecured creditor who is owed £11. (4 marks) (Total 11 marks) MODEL ANSWER TO QUESTION 6 (a) (i) (ii) Rate in the pound = £1 x £39.502.000 = £4.500.42 x £11.6S Owed and paid to secured creditors = (57.000 (b) Calculate the amount owed to unsecured creditor C who is paid £1.900 + S Total liabilities = £95.002.750 (b) Assets available for unsecured creditors = £34.900 + S) / (95.502.000 + 0.20 x (£23.791 Amount owed to unsecured creditors = £53.620 (iii) Let amount owed to secured creditors be S Total assets = £39. The following information relates to bankruptcy B: Total assets Total liabilities Owed to secured creditors £34.6 39.791) = £5.000 = £5.072.205 .20.205 £29.000 + S (39.791 .086.£29.£29.900) / (1 – 0.500.

000 / £65.39 x (£65.85% (b) Diminishing balance method: Scrap value as a fraction of initial cost = £2. depreciation in year 7 = £65.350 .£9.350 Year 2 0.£25.608158 = 0.000 Percentage to be written off each year = 100% x £9.000) / 7 = £9.000 / £65.000 .000 Depreciation in each year using the diminishing balance method: Year 1 0.QUESTION 7 Equipment E is depreciated over a period of 7 years.£15.97 Depreciation by the two methods is closest in year 3.000 = £25. (3 marks) (d) using the diminishing balance method. the equal instalment method and the diminishing balance method.000 and an estimated scrap value after 7 years of £2. (2 marks) (Total 12 marks) MODEL ANSWER TO QUESTION 7 (a) Equal instalment method: Amount to be written off each year = (£65.000 . the percentage of the initial cost to be written off each year.463.39% (c) Depreciation in each year using the equal instalment method = £9. (3 marks) (b) using the diminishing balance method.39 x (£65.50 .04 6 3003/4/09/MA Page 8 of 9 .000 x 0.000 = 13.£15.39 x (£65. the amount of depreciation in year 7.03076923 Over one year = 7 0.000 .74) = £5.753.50 Year 3 0.61 x 0. the rate of depreciation.39 x £65.000. with an initial cost of £65.03076923 = 0.50) = £9.000 = 0. (4 marks) (c) the year in which the two methods give amounts of depreciation that are closest to each other.432.74 Year 4 0. The depreciation is calculated separately by two methods.350) = £15.39 = £1.£2.432. (d) Using the diminishing balance method. Calculate: (a) using the equal instalment method.£25.000 . show your working.£25.306.463.608158 Rate of depreciation = 1 .0.350 .463.

based on year 2005 = 100.0 2008 99. (3 marks) (b) Write the indices for 2007 and 2008 as a chain base index.5 = 80 2008: Chain base index = 100 x 99 / 90 = 110 (c) Index for 2008 based on 2006 as 100 = 100 x 99 / 112. Year Index 2005 100 2006 112. (d) Calculate the index for 2005. (4 marks) The production in 2004 was 20% lower than in 2005.0 (a) Explain the change that occurred between 2005 and 2008. (b) 2007: Chain base index = 100 x 90 / 112. with 2004 as the base year. (3 marks) (c) Calculate the percentage change in production from 2006 to 2008. (2 marks) (Total 12 marks) MODEL ANSWER TO QUESTION 8 (a) Production fell by 1%.QUESTION 8 An index of production has the following values.5 2007 90.5 = 88 Percentage change in production = (88 – 100)% = -12% (d) Index for 2005 = 100 / 80% = 125 3003/4/09/MA Page 9 of 9 © Education Development International plc 2009 .

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