Advanced Business Calculations

Level 3

Model Answers
Series 4 2005 (Code 3003)

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Advanced Business Calculations Level 3
Series 4 2005

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Advanced Business Calculations Level 3
Series 4 2005
QUESTION 1 Karim Shah has a bank account on which simple interest is earned at 3¼ % per annum on credit balances. Simple interest is charged by the bank at 9.5% per annum on debit balances. Interest is calculated daily on all balances and earned/charged at the end of the month. The account for May is shown below: Date 30 Apr 2 May 15 May 26 May Details Balance c/f Cheque Cheque Deposit Debit £ 3,500.00 1,700.00 1,536.47 Credit £ Balance £ 4,231.56 Cr 731.56 Cr 968.44 Dr 568.03 Cr

The balance at the end of May, before interest and charges, is £568.03 in credit. Karim Shah uses the 'products method' to check the interest he receives from the bank. (a) Copy and complete the following table: Products method: Balance £ 4,231.56 731.56 ------------------Credit or Debit Credit Debit Credit ------------------Number of Days 2 13 5 Total Debit = Total Credit = Product 8,463.12 10,652.84 20,813.55 (7 marks) (b) Giving your answer to the nearest penny, calculate the net interest payable by Karim Shah on 31 May. (4 marks) (Total 11 marks)

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MODEL ANSWER TO QUESTION 1 Syllabus Topic 1: Simple and compound interest (1.2) (a) Balance £ 4,231.56 731.56 968.44 568.03 ----------------------------------(b) Interest payable to Karim Shah Interest payable by Karim Shah Net interest payable by Karim Shah = 20,813.55 x 3¼% ÷ 365 = £1.85 = 10,652.84 x 9.5% ÷ 365 = £2.77 = £2.77 - £1.85 = £0.92 Credit or Debit Credit Credit A1 Debit Credit ------------------------------Number of Days 2 13 11 5 Total Debit = Total Credit = Product 8,463.12 9,510.28 10,652.84 2,840.15 10,652.84 20,813.55

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QUESTION 2 An investor bought 1,500 8½% Preference Shares (nominal value £1) at 140 pence each, and 600 Ordinary Shares (nominal value £0.50) at 270 pence each. (a) Calculate the total cost of the shares. (3 marks) Broker's commission is 0.85% of the nominal value of the shares. (b) Calculate the commission paid on the shares. (3 marks) After two years the Preference Shares were sold for a total of £3,500 and the Ordinary Shares sold for 362p per share. (c) Calculate the total proceeds from the sale, before commission. (2 marks) The commission on the sales totalled £25. Dividends declared on the Ordinary Shares were: Year 1 Year 2 (d) Calculate: (i) (ii) the total dividends received by the investor on the Ordinary Shares the total dividends received by the investor on the Preference Shares (6 marks) (Total 14 marks) 16p per share 21p per share

(iii) the total income from dividends and sales of the shares, net of commission

MODEL ANSWER TO QUESTION 2 Syllabus Topic 2: Stock exchanges (2.2) (a) Cost of the shares = (1,500 x 140p) + (600 x 270p) = £2,100 + £1,620 = £3,720 (b) Broker’s commission = (1,500 x 1 + 600 x 0.5) x 0.85% = £15.30 (c) Proceeds from sale = £3,500 + 600 x 362p = £3,500 + £2,172 = £5,672 (d) (i) (ii) Dividends on Ordinary Shares = 600 x (16 + 21)p = £222 Dividends on Preference Shares = 2 x 8.5% x 1,500 = £255

(iii) Total net income = £5,672 + £222 + £255 - £25 = £6,124

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QUESTION 3 An industrial product may be manufactured by two methods of production. Using Method X, fixed costs are £6,500,000 per trading period and variable costs are £22.10 per unit of product. Using Method Y, fixed costs are £8,460,000 per trading period and variable costs are £16.50 per unit of product. (a) Calculate the level of output for which the total costs are the same. (4 marks)

Produced by Method X the product has unit costs of production during a trading period as follows (the figures include variable costs and apportioned fixed costs): Components Labour Production overheads Distribution expenses £ 8.35 15.00 7.65 3.60 (4 marks)

(b) Calculate the number of units produced in that trading period. (c) A company produces the product by Method X and sells it for £38.35 per unit of product. Calculate the output for break-even and the total costs of production for this output.

(5 marks) (Total 13 marks)

QUESTION 3 Syllabus Topic 3: Business ownership (3.2) (a) For an output of Q units Cost for Method X Cost for Method Y = £6,500,000 + £22.10Q = £8,460,000 + £16.50Q

Total costs are equal when Cost X = Cost Y 6,500,000 + 22.1Q = 8,460,000 + 16.50Q 5.6Q = 1,960,000 Q = 350,000 Output for which the total costs are the same is 350,000 units (b) Total cost per unit = £8.35 + £15.00 + £7.65 + £3.60 = £34.60 Total fixed cost per unit in the trading period = £34.60 - £22.10 = £12.50 Number of units produced in the trading period = £6,5000,000 ÷ £12.50 = 520,000 Syllabus Topic 3: Business ownership (3.3) (c) Contribution per unit = £38.35 - £22.10 = £16.25 Break even (number of units) = £6,500,000 ÷ £16.25 = 400,000 Total costs per period = £6,500,000 + 400,000 x £22.10 = £15,340,000

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QUESTION 4 The following information relates to an internet trader's business at the end of the first year of trading. Annual sales Annual purchases Sales returns Purchases returns Initial stock value Final stock value Overhead expenses (a) Calculate: (i) (ii) the cost of goods sold the net profit (3 marks) (4 marks) (2 marks) (2 marks) (c) Calculate the rate of stockturn. (3 marks) (Total 14 marks) £ 167,250 95,700 12,250 4,100 15,800 15,000 43,400

(iii) the overhead expenses as a percentage of the net sales. (b) Give a brief explanation of the difference between gross and net profit.

MODEL ANSWER TO QUESTION 4 Syllabus Topic 4: Profitability and liquidity (4.2) (a) (i) Net purchases = Purchases – Purchase returns = £95,700 - £4,100 = £91,600 COGS (Cost of Goods Sold) = Net purchases + Stock at start – Stock at end = £91,600 + £15,800 - £15,000 = £92,400 (ii) Net sales = Sales – Sales returns = £167,250 - £12,250 = £155,000 Gross profit = Net sales – COGS = £155,000 - £92,400 = £62,600 Net profit = Gross profit – Overhead expenses = £62,600 - £43,400 = £19,200 (iii) Overhead expenses as a percentage of net sales = £43,400/£155,000 x 100% = 28% (b) Gross profit is calculated before taking account of expenses; net profit is after deduction of overhead expenses

Syllabus Topic 4: Profitability and liquidity (4.3) (c) Average stock at cost = ½ (£15,800 + £15,000) = £15,400 Rate of stockturn = COGS/Average stock = £92,400/£15,400 = 6 times

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QUESTION 5 A business owner is considering an investment project. The capital cost of the project is £625,000. Including the initial cost, the estimated costs and returns are as follows: Year 0 cash outflow Year 1 cash inflow Year 2 cash inflow Year 3 cash inflow Year 4 cash inflow £ 625,000 50,000 250,000 400,000 150,000

The project chosen must earn a return of at least 12%. (a) Using a discount factor of 12% and the following table, calculate the net present value for the project. Discounting factor Year 1 Year 2 Year 3 Year 4 12% 0.893 0.797 0.712 0.636 (4 marks) (b) Assuming the owner requires the project to earn at least 12%, advise the owner whether or not to proceed with the project. (2 marks) The owner discovers that £50,000 of the capital cost of £625,000 can be paid after one year. (c) Calculate the new net present value and advise the owner. (6 marks) (Total 12 marks)

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MODEL ANSWER TO QUESTION 5 Syllabus Topic 5: Investment appraisal (5.4) (a) Year 0 Year 1 Year 2 Year 3 Year 4 Net Inflow (£) (625,000) 50,000 250,000 400,000 150,000 Discounting factor 1 0.893 0.797 0.712 0.636 Net present value = NPV (£) (625,000) 44,650 199,250 284,800 95,400 (900)

Syllabus Topic 5: Investment appraisal (5.4) (b) At the required discount factor of 12% the net present value is negative. If a return of 12% is required, the owner is advised not to proceed with the investment project. (c) Year 0 Year 1 Year 2 Year 3 Year 4 Net Inflow (£) (575,000) NIL 250,000 400,000 150,000 Discounting factor 1 0.893 0.797 0.712 0.636 Net present value = NPV (£) (575,000) 0 199,250 284,800 95,400 4,450

The project now is predicted to show a positive net present value and the owner is advised to proceed with the project.

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QUESTION 6 (a) In each of the following three bankruptcies, calculate the amount received by an unsecured creditor who is owed £4,500. (i) (ii) Bankruptcy A: The bankrupt trader pays £0.47 in the pound to unsecured creditors. (2 marks) Bankruptcy B: The bankrupt trader has assets of £20,700, owes £12,000 to secured creditors and £11,600 to unsecured creditors. (4 marks) (3 marks) (b) Calculate the amount owed by Bankrupt A to an unsecured creditor who is paid £1,527.50. (2 marks) (Total 11 marks)

(iii) Bankruptcy C: An unsecured creditor who is owed £3,600 receives £1,548.

MODEL ANSWER TO QUESTION 6 Syllabus Topic 6: Bankruptcy (6.2(7)), (6.3 (1)), (6.4 (3)) (a) (i) (ii) Unsecured creditor receives 0.47 x £4,500 = £2,115 Assets available for unsecured creditors = £20,700 - £12,000 = £8,700 Rate paid to unsecured creditors = (£8,700 ÷ £11,600) x £1 = £0.75 in the £ Unsecured creditor receives 0.75 x £4,500 = £3,375 (iii) Rate paid to unsecured creditors = (£1,548 ÷ £3,600) x £1 = £0.43 in the £ Unsecured creditor receives 0.43 x £4,500 = £1,935 (b) Amount owed = £1,527.50 ÷ 0.47 = £3,250

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QUESTION 7 A factory machine that costs £250,000 is estimated to have a life of 4 years and a scrap value of £12,000. (a) Using the equal instalment method, calculate: (i) (ii) the percentage of the cost which must be written off in total the percentage of the cost to be written off each year. (2 marks) (2 marks)

The factory owner decided to use the diminishing balance method, with a rate of depreciation of 20% per annum. (b) What will the value of the machine be after 4 years? (2 marks) (c) After how many years will the machine's value be less than £12,000? (3 marks) The owner decides that 20% is too low for this method. (d) What whole number percentage should the factory owner use to get a scrap value close to £12,000 after 4 years? (4 marks) (Total 13 marks)

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MODEL ANSWER TO QUESTION 7 Syllabus Topic 7: Depreciation of Business Assets (7.2) (a) (i) Percentage of cost to be written off over 4 years £250,000 - £12,000 = £250,000 (ii) £238,000 = £250,000 x 100% = 95.2%

Percentage to be written off each year = 95.2% ÷ 4 = 23.8%

Syllabus Topic 7: Depreciation of Business Assets (7.3) (b) Value after 4 years = £250,000 x 0.84 = £250,000 x 0.4096 = £102,400 (c) Initial value = £250,000 Value after 1 year = £250,000 x 0.8 = £200,000 Value after 2 years = £200,000 x 0.8 = £160,00 … … Value after 13 years = £13,744 Value after 14 years = £10,995 less than £12,000 Hence, at a depreciation of 20% per annum, it takes 14 years before the value of the machine is less than £12,000. (d) Annual rate of depreciation (diminishing balance) = d = 1 − Amount ÷ Principle = £12,000 = 0.048 £250
4
T

A/P

0.048 = 0.468

d = 1 − 0.468 = 0.532 = 53%

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QUESTION 8 An index of industrial productivity has the following values over the period 2001 to 2004, with 2000 as the base year. 2000 100 2001 107.7 2002 115.8 2003 130.1 2004 144.2

(a) Calculate these indices as a chain base index. Give each answer correct to one decimal place. (6 marks) (b) Calculate the percentage increase in industrial productivity between 2001 and 2003. (2 marks) An index of average earnings is shown below. 2002 (2000 = 100) 105.9 2004 (2002 = 100) 104.6 (2 marks) (d) Give a brief interpretation of your answer. (2 marks) (Total 12 marks)

(c) Calculate the index of average earnings for 2004 with 2000 as the base year.

MODEL ANSWER TO QUESTION 8 Syllabus Topic 8: Index numbers (8.5) (a) Example calculation: chain base index for 2003 = 100 x 130.1/115.8 = 112.3 2000 100 Chain base index 2001 107.7 107.7 2002 115.8 107.5 2003 130.1 112.3 2004 144.2 110.8

(b) Index for 2003 with 2001 as the base year = 100 x 130.1 ÷ 107.7 = 120.8 Percentage increase in industrial productivity between 2001 and 2003 = 20.8% (c) Index for 2004 with 2000 as the base year = 104.6 x 105.9/100 = 110.77 = 110.8 (d) From 2000 to 2004 average earnings increased by approximately 10.8%

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