LCCI International Qualifications

Advanced Business Calculations Level 3

Model Answers
Series 4 2009 (3003)

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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, teachers and candidates as they prepare for LCCI International Qualifications. 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, plus a fully worked example or sample answer (where applicable) where appropriate, 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 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 2009 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.

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QUESTION 1 Natalia deposits 45,000 in a bank account at 3% per annum simple interest. (a) How much interest will Natalia have earned after 2 years and 3 months? (3 marks) Natalia deposits a further 45,000 in another account at 2.85% per annum compound interest, also for a period of 2 years and 3 months. Interest is added annually and at the end of the period, and is calculated as compound interest throughout. (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 3.1% per annum for 3 years. At the end of the period, the amount (principle plus interest) is 30,137.60. (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. (3 marks) (Total 14 marks) MODEL ANSWER TO QUESTION 1 (a) 2 years + 3 months = 2.25 years Interest = PRT/100 = 45,000 x 2.25 x 3 / 100 = 3,037.50 (b) Amount = Principle x (1 + percentage rate) Amount = 45,000 x (1.0285)
2.25 Number of years

= 47,937.15

Interest = 47,937.15 45,000 = 2,937.15 Less than simple interest by: 3,037.50 - 2,937.15 = 100.35 (c) Initial investment = 30,137.60 / (1 + 0.031) = 27,500 (d) Interest = 30,137.60 - 27,500 = 2,637.60 Rate of simple interest = 100 x 2,637.60 / (3 x 27,500) = 3.2%
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QUESTION 2 Andy buys unit trusts and invests for income. He invested 50,000 in a unit trust with an offer price of 125 per unit, and sold the units after 5 years at 162 per unit. During this period he received income from the units of 6,200. This income was not reinvested in units. (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.

Beatrice buys unit trusts and invests for growth. She bought 2,200 units at a price per unit of 69, plus an initial charge of 5%. (b) Calculate the total cost of the units including initial charge. (3 marks)

Beatrice invested her income from the units in purchasing more of the same units. 5 years later, the number of units had grown to 2,532, and the total value of the units was 215,220. (c) Calculate (i) (ii) the price per unit at this time the percentage increase per annum in the price per unit. (2 marks) (2 marks) (Total 14 marks)

MODEL ANSWER TO QUESTION 2 (a) (i) (ii) Number of units purchased = 50,000 / 125 = 400 Increase in value = 400 x (162 - 125) = 14,800 Total = 14,800 + 6,200 = 21,000 (iii) Yield per annum = 21,000 / (50,000 x 5) = 0.084 = 8.4% (b) Cost of units before charge = 2,200 x 69 = 151,800 Total cost = 1.05 x 151,800 = 159,390 (c) (i) (ii) Price per unit = 215,220 / 2,532 = 85 Increase per annum in unit price = 100% x (85 - 69) / (69 x 5) = 4.6%

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QUESTION 3 Product P has variable costs per unit of product of 150, and fixed costs of 1,952,000 per period. 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. 60% of the labour costs vary directly with the number of units produced. The production overheads do not vary irrespective of how many units are produced.

(a) Calculate the percentage of distribution expenses that vary directly with the number of units produced. (4 marks) (b) Calculate the fixed costs per unit. (2 marks) (c) Calculate the number of units produced in the trading period. (2 marks)

Product P breaks even on production and sales of 12,800 units per period. (d) Calculate the selling price of product P. (3 marks) (e) Calculate the total cost of production at break even. (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 - 150 = 122 (c) Number of units produced = 1,952,000/122 = 16,000 units (d) Contribution per unit = 1,952,000/12,800 = 152.50 Selling price = Variable cost + contribution = 150 + 152.50 = 302.50 per unit (e) Total cost of production at break even = (12,800 x 150) + 1,952,000 = 3,872,000

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QUESTION 4 A retailers balance sheet at the end of a trading year shows current assets of 35,260 and current liabilities of 17,200. The current assets include stock of 12,040, bank account of 7,700, cash of 532 and an amount owed by debtors. (a) Calculate: (i) (ii) the amount owed by debtors the acid test ratio. (2 marks) (3 marks)

(b) State whether or not you would judge the liquidity of the business to be healthy. (1 mark) (c) Give a reason for your answer to (b). (1 mark) The stock held at the start of the trading year was 10,750, and the net purchases during the year were 138,030. (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 = 35,260 (12,040 + 7,700 + 532) = 14,988 Current assets stock = (35,260 - 12,040) = 23,220 Acid test ratio = Current assets stock = 23,220 = 1.35 current liabilities 17,200 (b) Yes, the liquidity is healthy. (c) The acid test ratio is above the recommended ratio of 1. The business can pay its liabilities without selling stock. (d) (i) (ii) Average stock held = x (12,040 + 10,750) = 11,395 Cost of goods sold (CoGS) = stock at start + net purchases - stock at end = 10,750 + 138,030 - 12,040 = 136,740 (iii) Rate of stockturn = CoGS = 136,740 = 12 times average stock 11,395

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QUESTION 5 Colin is considering whether to invest in an investment project with an initial cost of 550,000 and an estimated revenue return of 150,000 per annum for 5 years. He uses the following table of discounting factors: Discounting factor 0.901 0.812 0.731 0.659 0.593

Year 1 Year 2 Year 3 Year 4 Year 5

(a) Calculate the net present value of the project. (4 marks) (b) Advise Colin whether the project is a worthwhile investment at the discount rate used. (1 mark) (c) Calculate the discount rate used. (2 marks) (d) Explain what the net present value calculated in (a) represents. (1 mark) At a discount rate of 10% the project has a net present value of 18,500. (e) Calculate the internal rate of return of the project. (3 marks) (Total 11 marks)

MODEL ANSWER TO QUESTION 5 (a) Present value of revenue = 150,000 x (0.901 + 0.812 + 0.731 + 0.659 + 0.593) = 150,000 x 3.696 = 554,400 Net present value of project = 554,400 - 550,000 = 4,400 (b) The project is a worthwhile investment. (c) Discount rate is given by (1 / 0.901) = 1.11 Discount rate = 1.11 1 = 0.11 = 11% (d) The positive net present value in (a) means that the project is expected to earn more than 11%. (e) Internal rate of return = 11% x 18,500 10% x 4,400 = 11.3% 18,500 - 4,400

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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 11,000 (2 marks) (2 marks) (3 marks) 39,900 95,000 60%

(iii) the amount owed and paid to secured creditors.

The following information relates to bankruptcy B: Total assets Total liabilities Owed to secured creditors 34,502,791 53,086,205 29,500,000

(b) Calculate the amount owed to unsecured creditor C who is paid 1,072.20. (4 marks) (Total 11 marks)

MODEL ANSWER TO QUESTION 6 (a) (i) (ii) Rate in the pound = 1 x 39,900 / 95,000 = 0.42 Paid to unsecured creditor who is owed 11,000 = 0.42 x 11,000 = 4,620

(iii) Let amount owed to secured creditors be S Total assets = 39,900 + S Total liabilities = 95,000 + S (39,900 + S) / (95,000 + S) = 0.6 39,900 + S = (95,000 + S) x 0.6 = 57,000 + 0.6S Owed and paid to secured creditors = (57,000 39,900) / (1 0.6) = 42,750 (b) Assets available for unsecured creditors = 34,502,791 - 29,500,000 = 5,002,791 Amount owed to unsecured creditors = 53,086,205 - 29,500,000 = 23,586,205 Owed to unsecured creditor C = 1,072.20 x (23,586,205 / 5,002,791) = 5,055

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QUESTION 7 Equipment E is depreciated over a period of 7 years, with an initial cost of 65,000 and an estimated scrap value after 7 years of 2,000. The depreciation is calculated separately by two methods, the equal instalment method and the diminishing balance method. Calculate: (a) using the equal instalment method, the percentage of the initial cost to be written off each year. (3 marks) (b) using the diminishing balance method, the rate of depreciation. (4 marks) (c) the year in which the two methods give amounts of depreciation that are closest to each other. show your working. (3 marks) (d) using the diminishing balance method, the amount of depreciation in year 7. (2 marks) (Total 12 marks)

MODEL ANSWER TO QUESTION 7 (a) Equal instalment method: Amount to be written off each year = (65,000 - 2,000) / 7 = 9,000 Percentage to be written off each year = 100% x 9,000 / 65,000 = 13.85% (b) Diminishing balance method: Scrap value as a fraction of initial cost = 2,000 / 65,000 = 0.03076923 Over one year =
7

0.03076923 = 0.608158

Rate of depreciation = 1 - 0.608158 = 0.39% (c) Depreciation in each year using the equal instalment method = 9,000 Depreciation in each year using the diminishing balance method: Year 1 0.39 x 65,000 = 25,350 Year 2 0.39 x (65,000 - 25,350) = 15,463.50 Year 3 0.39 x (65,000 - 25,350 - 15,463.50) = 9,432.74 Year 4 0.39 x (65,000 - 25,350 - 15,463.50 - 9,432.74) = 5,753.97 Depreciation by the two methods is closest in year 3. (d) Using the diminishing balance method, depreciation in year 7 = 65,000 x 0.61 x 0.39 = 1,306.04
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QUESTION 8 An index of production has the following values, based on year 2005 = 100. Year Index 2005 100 2006 112.5 2007 90.0 2008 99.0

(a) Explain the change that occurred between 2005 and 2008. (3 marks) (b) Write the indices for 2007 and 2008 as a chain base index. (3 marks) (c) Calculate the percentage change in production from 2006 to 2008. (4 marks) The production in 2004 was 20% lower than in 2005. (d) Calculate the index for 2005, with 2004 as the base year. (2 marks) (Total 12 marks)

MODEL ANSWER TO QUESTION 8 (a) Production fell by 1%. (b) 2007: Chain base index = 100 x 90 / 112.5 = 80 2008: Chain base index = 100 x 99 / 90 = 110 (c) Index for 2008 based on 2006 as 100 = 100 x 99 / 112.5 = 88 Percentage change in production = (88 100)% = -12% (d) Index for 2005 = 100 / 80% = 125

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