Advanced Business

Calculations

Level 3
Series 2
2004 (Code
3003)

Model Answers

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Advanced Business Calculations Level 3

Series 2 2004

How to use this booklet

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(1)
(2)

Questions
Model Answers

reproduced from the printed examination paper

summary of the main points that the Chief Examiner expected to

(3)

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Advanced Business Calculations Level 3

Series 2 2004
QUESTION 1
(a) Serena has a bank account on which simple interest is earned at 2% per annum on credit
balances. Simple interest is charged by the bank at 7% per annum on debit balances.
Interest is calculated daily on all balances and is both paid and earned at the end of the month.
The account for October is shown below.
Date

Details
1Oct
3Oct
15Oct
24Oct

Debit

Balance b/f
Cheque
Cheque
Deposit

Credit

4,500.00
4,000.00
3,151.85

Balance

7,232.08 Cr
2,732.08 Cr
1,267.92 Dr
1,883.93 Cr

The balance at the end of October, before interest and charges, is 1,883.93 in Credit.
Serena uses the products method to check the interest she receives from the bank.
(i)

Copy and complete the following

table: Products Method:
Balance
7,232.08
2,732.08
1,267.92
---------------------

Credit or Debit
Credit

Number of Days
3
12

Credit
-----------------------

7
Total Debit
Total Credit

Product
21,696.24
32,784.96
11,411.28

(7 marks)

(ii)

Giving your answer to the nearest penny, calculate the final balance figure on 31 October.
(4 marks)

(b) Calculate the interest on 35,000 deposited at 2.8% compound interest for 17 years.
(4 marks)

(Total 15 marks)

Model Answer to Question 1

(a) (i)

Products Method:

Balance
7,232.08
2,732.08
1,267.92
1,883.93
--------------------(ii)

Credit or Debit
Credit
Credit
Debit
Credit
-----------------------

Number of Days
3
12
9
7
Total Debit
Total Credit

Product
21,696.24
32,784.96
11,411.28
13,187.51
11,411.28
67,668.71

Interest due = Total debit or credit x annual interest rate

365
Interest owed by Serena = 11,411.28 x 7% 365 = 2.34
Interest owed to Serena = 67,668.71 x 2% 365 = 5.10
Final balance figure = 1,883.93 + 5.10 - 2.34 = 1,886.69 in Credit

(b) Amount = 35,000 x (1 + 0.028)17 = 55,969.44

Interest = 55,969.44 35,000 = 20,969.44

QUESTION 2
An investor bought 7,500 Ordinary Shares (nominal value 0.50) at 420 pence each. After three
years, the investor sold the shares at 465 pence. She paid a total of 50 brokers commission.
(a) Calculate the capital gain from the purchase and sale of the shares.
(3 marks)

The dividends declared on the nominal value of the ordinary shares were:
Year 1
12%

Year 2
10.5%

Year 3
11.5%

(b) Calculate the total dividends received by the investor.

(4 marks)

Instead of investing in Ordinary Shares the investor could have invested the same money in a Unit
Trust, buying the units at 5 each and selling them after three years at 5.70 each. Assume that the
units are accumulative, that is, the price includes the dividends.
(c) Calculate the profit the investor would have made from the Unit Trust and compare the two
investments.
(5 marks)

(Total 12 marks)

Model Answer to Question 2

(a) Cost of shares = 7,500 x 4.20 = 31,500
Income from sale = 7,500 x 4.65 = 34,875
Capital gain = 34,875 - 31,500 - 50 = 3,325
(b) Total percentage dividend = (12 + 10.5 + 11.5)% = 34%
Nominal value of shares = 7,500 x 0.50 = 3,750 Total
dividend = 3,750 x 34% = 1,275
(c) Number of units purchased = 31,500 5 = 6,300
Net income from units = 6,300 x (5.70 - 5) = 4,410
Net income from shares = 3,325 + 1,275 = 4,600
Shares were better by 190

QUESTION 3
A manufacturers product is sold to customers at 54 per unit. Manufacturing costs are as follows:
Fixed costs
Variable costs
Calculate:

180,000 per period

29 per unit

(a) the break-even point per period (in units)

(3 marks)

(b) the total costs at this output

(2 marks)

(c) the profit or loss at an output of 7,000 units and at 10,000 units per period

(4 marks)

(d) the output for a profit of 50,000 in a period.

(3 marks)
(Total 12 marks)

Model Answer to Question 3

(a) Contribution per unit = 54 29 = 25 Breakeven point = Fixed costs Contribution
= 180,000 25 = 7,200 units
(b) Total costs = 180,000 + (7,200 x 29) = 388,800
(c) Number of units different from break-even = break-even number of units
At 7,000 units, difference = 200

At 10,000 units, difference = +2,800

Profit or loss = Number of units difference x Contribution

At 7,000 units, loss = -200 x 25 = -5,000 (loss)
At 10,000 units, profit = 2,800 x 25 = 70,000 (profit)
(d) Difference in units from break-even = Profit contribution
= 50,000 25 = 2,000
Output = break-even + 2,000 = 9,200 units

QUESTION 4
A retailers Balance Sheet at the end of the first year of trading is shown below:
Balance Sheet as at 31 December 2003

Fixed Assets
premises
equipment
furniture
van
Current Assets
stock
debtors
bank
cash
Amounts due within 12 months

52,000
15,500
4,700
8,850
81,050
8,827
3,730
3,580
256

16,393

trade creditors
Net current assets

6,305
10,088

Amount due after 12 months

91,138

mortgage on premises
Financed by

(58,000)
33,138

capital
25,000
Add net profit
12,238
Less drawings
(4,100)
(a) Using the above figures, calculate:

33,138

(i) Current ratio

(3 marks)

(ii) Borrowing ratio (capital gearing ratio)

(3 marks)

(iii) Acid test ratio (quick-asset ratio; liquid capital ratio).

(3 marks)

(b) Give a brief interpretation of your figure for current ratio. Your interpretation should include a brief
explanation of the ratio, together with a judgement of the value obtained.
(4 marks)
(Total 13 marks)

Model Answer to Question 4

(a) (i)
Current ratio = Current assets = 16,393 = 2.6
(ii)

Current liabilities 6,305

Borrowing ratio= Total borrowings = 58,000 = 1.75

Net worth
(Or: Borrowing ratio= Total borrowings
(iii)

33,138
= 58,000 = 0.64

Net worth + mortgage 91,138

Acid test ratio = Cash + bank + debtors = 7,566 = 1.2
Current liabilities

6,305

(b) The current ratio compares the current assets with current liabilities. This tells us whether a
company has enough trading assets in total to cover current liabilities.
For this company the ratio is more than 2. This is good liquidity and is a good situation for the
company.

QUESTION 5
A business owner has a choice of 2 investment projects. The estimated costs and returns are as
follows:

Cost Year 0
Year 1 cash flow

Project One

(2,750,000)
(150,000) outflow

Year 2 cash inflow

Year 3 cash inflow

2,250,000
1,950,000

Project Two

(2,500,000)
200,000 inflow
1,500,000
1,920,000

(a) For Project One calculate the payback period. Give your answer in years and months.
(4 marks)

(b) The payback period for Project Two is 2 years 5 months. Advise the business owner which
project is the better investment. Give a reason.
(2 marks)

(c) Using a discount factor of 16%, and the following table, calculate the net present value for
Project One.
Discounting factor
Year 1
Year 2
Year 3

16%
0.862
0.743
0.641
(5 marks)

At a discount factor of 18% the net present value of Project One is (74,000) ie negative.
(d) Using this information and your answer to part (c), estimate the internal rate of return of
Project One.
(3 marks)

(Total 14 marks)

Model Answer to Question 5

(a) For Project One ()
Cost

Year

2,750,000

Net Cash Flow

(150,000)

2
3
Investment is paid back during year 3:
Number of months:

650,000

Cumulative Cash Flow

(150,000)

2,250,000
2,100,000
1,950,000
4,050,000
2,750,000 2,100,000 = 650,000
= 1 year = 4 months

1,950,000

Hence payback period = 2 years 4 months

(b) On the basis of the payback period
Project One is the better investment.
It has a shorter payback period.

(c) Project One

Year
0
1
2
3

Discounting

Net Cash

Present

Factor

Flow ()
(2,750,000)
(150,000)
2,250,000
1,950,000

Value ()
(2,750,000)
(129,300)
1,671,750
1,249,950
42,400

0.862
0.743
0.641

Net Present Value = 42,400

(d) Internal rate of return = 16% +
(estimated)

42,400
42,400 + 74,000

10

x 2% = 16.7285% 16.7%

QUESTION 6
Andreas is owed 35,000 by Unlucci plc.
When Unlucci plc is declared bankrupt, Andreas finds he is an unsecured creditor and eventually
receives only 21,700 in payment.
(a) Calculate the rate in the which is payable to unsecured creditors.
(2 marks)

The total owed to unsecured creditors by Unlucci plc is 110,000. They also owe 34,000 to secured
creditors. The expenses of winding up the business are 5,800.
(b) Calculate the value of the assets of the business.
(3 marks)

(c) Express the assets as a fraction of the liabilities. Give the fraction in its lowest terms.
(3 marks)

(d) Express the assets as a percentage of the liabilities.

(2 marks)

(Total 10 marks)

Model Answer to Question 6

(a) Proportion paid to unsecured creditors = Amount received
Amount owed
21,700 x 1 = 0.62 = 62p in the
35,000

(b) Total paid to unsecured creditors = 0.62 x 110,000 = 68,200

Total assets = 68,200 + 34,000 + 5,800 = 108,000
(c) Total liabilities = 110,000 + 34,000 = 144,000
Business assets as a fraction of liabilities
=

108,000 = 3
144,000 4

(d) Business assets as a percentage of liabilities

=
108,000 x 100% = 75%
144,000

11

QUESTION 7
The following is an extract from a depreciation table based on the equal instalment method of
depreciation:
Annual
depreciation ()

Cumulative
depreciation ()

Book value at
end of year ()

Initial cost
Year 1
Year 2

62,400

Year 3

56,400

Year 4

75,200

Year 5
(a) Copy and complete the table.
(6 marks)

(b) Calculate the percentage of the initial cost that is to be written off each year.
(2 marks)

A factory machine is depreciated by the diminishing balance method with a rate of depreciation of
30% per annum and an estimated residual value after 5 years of 20,000.
(c) Giving your answer correct to the nearest 1,000, calculate the initial cost of the machine.
(5 marks)

(Total 13 marks)

Model Answer to Question 7

(a) Annual depreciation = 75,200 56,400 = 18,800

Initial cost
Year 1
Year 2
Year 3
Year 4
Year 5

Annual
depreciation ()

Cumulative
depreciation ()

18,800
18,800
18,800
18,800
18,800

18,800
37,600
56,400
75,200
94,000

Book value at
end of year ()
100,000
81,200
62,400
43,600
24,800
6,000

(b) Percentage to be written off each year = 18,800 x 100% = 18.8%

100,000
(c) 1 d = 1 0.3 = 0.7
(1 d)5 = (0.7)5 = 0.16807
Original cost = 20,000 = 118,998 = 119,000
0.16807

12

QUESTION 8
(a) An index of industrial production at January 2004 is shown below:
Group
Mining and quarrying

Weight
158

Construction
Gas, electricity, water
Manufacturing
Transport

282
200
129
231

Index (Jan 2003 = 100)

86
84
107
95
99

Calculate the composite index of industrial production at January 2004, with

January 2003 = 100.
(5 marks)

(b) The price of a particular item in April 2001 was 5.60 and the price of the same item in April 2002
was 6.72.
(i)

Calculate the price index and price relative for the item for April 2002 with April 2001
as the base period. State clearly which of your answers is which.
(4 marks)

(ii)

The price relative for April 2003 with April 2002 as the base period is 1.5. Calculate the price
in April 2003.
(2 marks)

(Total 11 marks)

Model Answer to Question 8

(a) Group

Weight(W)

Mining and quarrying

Construction
Gas, electricity, water
Manufacturing
Transport
Totals
Weighted index = WI /

158

WI

86

13,588

282
84
200
107
129
95
231
99
W = 1,000
W = 93,800 / 1,000 = 93.8 = 94

23,688
21,400
12,255
22,869
WI = 93,800

(b) (i) Proportional increase = 6.72 / 5.60 = 1.2

Price relative = 1.2
Price index = 1.2 x 100 = 120
(ii)

Index(I)

April 2003 price = 1.5 x 6.72 = 10.08

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