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Advanced Business Calculations Level 3

Model Answers

Series 2 2011 (3003)

For further information contact us:

Tel. +44 (0) 8707 202909 Email. enquiries@ediplc.com www.lcci.org.uk

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

(ii)

(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 RT P = 100 x £2,535 = £19,500 3.25 x 4

M1

A1

(ii)

**Interest = £19,500 x 3.25% = £633.75
**

4

M1 A1

(b)

(1 + 0.0325) = 1.13647593 Of which 1.13647593 – 1 = 0.13647593 represents the interest Principal = £2,535 / 0.13647593 = £18,575

M1 M1 M1 A1

(c)

Number of time periods = 2 x 3 = 6 Interest per time period = 3.55% ÷ 2 = 1.775% A = £59,000 x (1 + 0.01775) = £59,000 x 1.01775 = £65,569.02.

6 6

M1 M1 M1 A1 (Total 12 marks)

3003/2/11/MA

Page 2 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) (ii) (iii) the nominal value of the stock purchased (2 marks) the number of years for which she held the stock (2 marks) 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) (ii) (iii)

Nominal value of stock = £34,800 / 0.87 = £40,000 Number of years = £5,600 / (£40,000 x 0.035) = 4 years Percentage yield = £5,600 / £34,800 = 0.16 = 16% Number of units = £34,800 / £43.50 = 800 Increase in value = (800 x £52.20) - £34,800 = £6,960

M1 A1 M1 A1 M1 A1 M1 A1 M1 A1 M1 M1 A1 (Total 13 marks)

(b)

(i) (ii)

(c)

Yield on stock per annum = 16% / 4 = 4% Percentage increase in units = £6,960 / (£34,800 x 4) = 0.05 = 5% per annum The increase in units is 1% per annum higher

3003/2/11/MA

Page 3 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 Variable cost per unit of product Calculate: (i) (ii) the profit or loss at an output of 150,000 units per period (3 marks) the break-even point in units per period. (2 marks) £1,982,500 £32

(c)

Manufacturer M also produces product R. Product R has unit costs of production during a period as follows: £ 24.40 7.75 15.00 3.20

Components Labour Production overheads Distribution expenses

Additional Information

1 2 3 4 5

The cost of components varies directly with the number of units produced 80% 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 65% of the distribution expenses vary directly with the number of units produced 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 4 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 Excess of sales above break-even = £204,750 / £10.50 = 19,500 Break-even = 109,000 – 19,500 = 89,500 units per period

M1 M1 M1 A1 M1 M1 A1 M1 A1 M1 A1 M1 A1 (Total 13 marks)

(b)

(i)

Contribution = £45 - £32 = £13 Profit (loss) = (150,000 x £13) - £1,982,500 = -£32,500 (loss)

(ii) (c) (i) (ii)

Break-even = £1,982,500 / £13 = 152,500 units per period Variable cost per unit = £24.40 + (0.8 x £7.75) + (0.65 x £3.20) = £32.68 Total cost per unit = £24.40 + £7.75 + £15.00 + £3.20 = £50.35 Variable cost as a percentage = 100% x £32.68 / £50.35 = 64.9%

3003/2/11/MA

Page 5 of 13

QUESTION 4

(a)

At the end of the year 2010 the following information applied to company C: Current liabilities Current ratio Acid test ratio Calculate: (i) (ii) (iii) the current assets (2 marks) the stock held by company C at that time (2 marks) State whether you think the liquidity of company C is healthy or not. (1 mark) £4,450,000 2.6 1.4

(b)

During 2010 the following information relates to a trader T. £ 805,000 540,000 25,600 24,400 112,000

Net sales Cost of goods sold Initial stock value Final stock value Overhead expenses Calculate: (i) (ii) (iii) (iv) gross profit

(2 marks) net profit (2 marks) net purchases (2 marks) the rate of stockturn (stock turnover per annum). (3 marks) (Total 14 marks)

3003/2/11/MA

Page 6 of 13

MODEL ANSWER TO QUESTION 4 Syllabus Topic 4: Profitability and liquidity (4.2) and (4.3)

(a)

(i) (ii) (iii)

Current assets = 2.6 x £4,450,000 = £11,570,000 Stock held = (2.6 – 1.4) x £4,450,000 = £5,340,000 Yes. Gross profit = Net sales – COGS = £805,000 – £540,000 = £265,000 Net profit = Gross profit – overhead expenses = £265,000 – £112,000 = £153,000

M1 A1 M1 A1 A1 M1 A1 M1 A1 M1 A1 M1 M1 A1 (Total 14 marks)

(b)

(i) (ii)

(iii)

Net purchases = COGS – initial stock + final stock = £540,000 – £25,600 + £24,400 = £538,800

(iv)

Average stock = ½(£25,600 + £24,400) = £25,000

Rate of stockturn = COGS / Average stock = £540,000 / £25,000 = 21.6

3003/2/11/MA

Page 7 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 Initial cost Repair and maintenance costs per annum 320,000 25,000 Project Two 280,000 15,000

Revenue returns before taking account of repair and maintenance cost Year 1 Year 2 Year 3 Year 4 Year 5 30,000 60,000 100,000 100,000 75,000 40,000 80,000 80,000 80,000 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. £ 2,247,500 500,000 750,000 750,000 750,000

Cost (year 0) Year 1 Net cash inflow Year 2 Net cash inflow Year 3 Net cash inflow Year 4 Net cash inflow

The owner calculates the net present value using a discount rate of 8.1% and the following table: Discount rate 8.1% Year 1 Year 2 Year 3 Year 4 (i) Discount factors 0.925 0.856 0.792 0.732

Calculate the net present value of Project Three on the basis of the figures given (4 marks) Estimate the internal rate of return of Project Three. (1 mark) (Total 12 marks)

(ii)

3003/2/11/MA

Page 8 of 13

MODEL ANSWER TO QUESTION 5 Syllabus Topic 5: Investment appraisal (5.3), (5.4), (5.5) and (5.6)

(a) Initial cost Total revenue returns Average returns per annum Average returns net of repairs and maintenance Average rate of return

Project One 320,000 365,000 73,000 48,000 48,000 320,000 = 15% By the average rate of return method of investment appraisal, Project Two is the preferred investment.

Project Two 280,000 355,000 71,000 56,000 56,000 280,000 = 20% M1 M1 M1

M1 A1 A1

A1

(b)

(i)

£ 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

Discount factor 1.0 0.925 0.856 0.792 0.732

Present value (£) (2,247,500) 462,500 642,000 594,000 549,000 Nil M1 M1

Net present value =

M1 A1

(ii)

Estimated internal rate of return = 8.1%

A1 (Total 12 marks)

3003/2/11/MA

Page 9 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) (ii) (iii) Express the business assets as a percentage of the liabilities (2 marks) State how much will be paid to the secured creditors (1 mark) 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) (ii) how much John was paid if he was an unsecured creditor (2 marks) 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) (ii) (iii)

Assets / liabilities = £138,600 / (£39,175 + £205,000) = 0.568 = 57% Secured creditors received £39,175 Available for unsecured creditors = £138,600 - £39,175 = £99,425 Rate paid to unsecured creditors = £1 x £99,425 / £205,000 = 48.5p

M1 A1 A1 M1 M1 A1

(b)

(i) (ii)

As an unsecured creditor, John received 0.335 x £24,000 = £8,040 Unsecured debt = £24,000 - £10,000 = £14,000

M1 A1 M1 M1 A1 (Total 11 marks)

Paid to John on unsecured debt = 0.335 x £14,000 = £4,690 Total paid to John = £10,000 + £4,690 = £14,690

3003/2/11/MA

Page 10 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) (ii) (iii) (iv) the depreciation that occurs during the first year (2 marks) the book value at the end of the first year (2 marks) the book value at the end of the second year (2 marks) 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

Page 11 of 13

MODEL ANSWER TO QUESTION 7 (Syllabus Topic 7: Depreciation of Business Assets (7.3)

(a)

(i) (ii) (iii) (iv)

Depreciation in year 1 = 40% x £8,500,000 = £3,400,000 Book value at the end of year 1 = (1 – 0.4) x £8,500,000 = £5,100,000 Book value at the end of year 2 = 0.6 x 0.6 x £8,500,000 = £3,060,000 Depreciation during year 3 = 0.4 x £3,060,000 = £1,224,000

M1 A1 M1 A1 M1 A1 M1 A1

(b)

Schedule of depreciation (all figures in £): Year Annual Depreciation Cumulative Depreciation Book value at end of year 1,101,600 660,960 396,576 M1 A1

4 5 6

440,640 264,384 M1

7,839,040 8,103,424 M1

A1 (Total 13 marks)

QUESTION 8

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

(i) (ii) (iii)

the price relative for Product S for year 2010 with year 2009 as the base year (2 marks) the chain base index of prices for Product S for the years 2007 to 2010 (3 marks) 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 12 of 13

MODEL ANSWER TO QUESTION 8 Syllabus Topic 8: Index numbers (8.2), (8.3) and (8.4)

(a)

(i) (ii) Year Index (iii) Year Index

Price relative = £18.00 / £22.50 = 0.8 Chain base index: 2007 100 2008 104 2009 90 2010 80

M1 A1

A1 A1 A1 M1

Example calculation, for year 2009: Index = 100 x 165,000 / 150,000 = 110 2007 100 2008 80 2009 110 2010 135

A1 A1 A1

(b)

Price in 2006 = £24 + £2.50 = £26.50 Relative for sales = 1.25 x (£24.00 / £26.50) = 1.132 Percentage increase = 13.2%

M1 M1 A1 (Total 12 marks)

3003/2/11/MA

Page 13 of 13

© Education Development International plc 2011

EDI International House Siskin Parkway East Middlemarch Business Park Coventry CV3 4PE UK Tel. +44 (0) 8707 202909 Fax. +44 (0) 2476 516505 Email. enquiries@ediplc.com www.ediplc.com

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