LCCI International Qualifications

Advanced Business Calculations Level 3

Model Answers
Series 4 2011 (3003)

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Advanced Business Calculations Level 3

Series 4 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

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QUESTION 1 On account A, the rate of interest is 5% per annum. (a) Based on dividing the amount of interest equally between the first and second halves of the year, state the rate of interest for a 6-month period (simple interest method). (1 mark) Based on the same proportional increase in the amount over the first and second halves of the year, calculate the rate of interest for a 6-month period (compound interest method). (2 marks)

(b)

On accounts B and C, the rate of interest is 3% per half year. (c) On account B, based on a rate of interest of 3% per half year, calculate the simple interest on 500 over a period of 4 years. (2 marks) On account C, based on a rate of interest of 3% per half year, calculate the compound interest on 500 over a period of 4 years. (4 marks) (e) On account C, express the increase in value over 4 years as an index. (2 marks) (Total 11 marks)

(d)

MODEL ANSWER TO QUESTION 1 Syllabus Topic 1: Simple and compound interest (1.2) and (1.3) (a) (b) Rate of interest =2.5% 1.05 = 1.024695 Rate of interest = 2.47% (c) (d) Simple interest = 3% x 2 x 4 x 500 = 120 Number of time periods = 2 x 4 = 8 Amount (principal + interest) = 500 x (1.03) = 633.385 Interest = 633.385 - 500 = 133.385 = 133.39 Syllabus Topic 8: Index numbers (8.2) (e) Index = 100 x (1.03) = 126.7
8 8

A1 M1 A1 M1 A1 M1 M1 A1 A1r

M1 A1 (Total 11 marks)

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QUESTION 2 Sinita bought unit trusts and invested for income. She invested 42,000 in a unit trust with an offer price of 75 per unit, and sold the units after 3 years at the same price. During this period she received income from the units of 9,744. This income was not reinvested in units. Calculate: (a) (b) (c) the number of units purchased (2 marks) the percentage yield per annum (3 marks) the (3 year) income per unit. (2 marks) Sinita had to pay the following charges: Fee on purchase: 0.2% of the sum invested Fee on sale: 0.3% of the sum received Fund management fees of 525 Calculate: (d) (e) (f) the total charges paid (2 marks) the total charges as a percentage of the original investment (2 marks) Sinitas income net of fees. (2 marks) (Total 13 marks)

MODEL ANSWER TO QUESTION 2 Syllabus Topic 2: Stock exchanges (2.5) (a) (b) Number of units = 42,000 / 75 = 560 Income per annum = 9,744 / 3 = 3,248 Percentage yield per annum = 3,248 / 42,000 = 0.07733 = 7.7% (c) (d) (e) (f) Income per unit = 9,744 / 560 = 17.4 Total charges = 42,000 x (0.2% + 0.3%) + 525 = 735 Charges percent = 735 / 42,000 = 0.0175 = 1.75% Income net of fees = 9,744 - 735 = 9,009 M1 A1 M1 M1 A1 M1 A1 M1A1 M1 A1 M1 A1 (Total 13 marks)

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QUESTION 3 Thomas draws a break-even chart. To represent sales, he draws a straight line through the origin and the point (10,000 units, 66,000). Calculate: (a) (b) the selling price per unit of product (2 marks) the income from sales of 12,000 units. (2 marks) To represent total manufacturing costs, Thomas draws a line through the points (0 units, 20,000) and (10,000 units, 70,000). Calculate: (c) (d) (e) (f) the variable cost per unit (3 marks) the contribution per unit (2 marks) the total cost of manufacturing 12,000 units (3 marks) the number of units manufactured and sold to achieve break-even. (2 marks) (Total 14 marks)

MODEL ANSWER TO QUESTION 3 Syllabus Topic 3: Business ownership (3.2) and (3.3) (a) (b) (c) Selling price per unit of product = 66,000 / 10,000 = 6.60 Income from sales of 12,000 units = 12,000 x 6.60 = 79,200 Variable cost for manufacture of 10,000 units = 70,000 - 20,000 = 50,000 Variable cost per unit = 50,000 / 10,000 = 5 (d) (e) Contribution per unit = 6.60 - 5 = 1.60 Variable cost of manufacturing 12,000 units = 12,000 x 5 = 60,000 Total cost of manufacturing 12,000 units = 60,000 + 20,000 = 80,000 (f) Number of units for break-even = 20,000 / 1.60 = 12,500 units M1 A1 M1 A1 M1 M1 A1 M1 A1 M1 M1 A1 M1 A1 (Total 14 marks)

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QUESTION 4 The following information relates to a retailers business at the end of the first year of trading. 183,700 84,590 3,980 2,305 12,000 14,400 9,360 540 1,030 8,650 8,600

Annual sales Annual purchases Sales returns Purchases returns Initial stock value Final stock value General expenses Postage Telephone & Internet Advertising Vehicle expenses Calculate: (a) (b) (c) (d) (e) the cost of goods sold

(3 marks) gross profit as a percentage of net sales (3 marks) overhead expenses as a percentage of net sales (2 marks) the average length of time that items remained in stock, giving your answer in days (3 marks) the net profit. (2 marks) (Total 13 marks)

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MODEL ANSWER TO QUESTION 4 Syllabus Topic 4: Profitability and liquidity (4.2) and (4.3) (a) Net purchases = Annual purchases purchase returns = 84,590 - 2,305 = 82,285 Cost of goods sold (COGS) = Net purchases + initial stock - final stock = 82,285 + 12,000 - 14,400 = 79,885 (b) Net sales Gross profit = Annual sales - sales returns = 183,700 - 3,980 = 179,720 = Net sales COGS = 179,720 - 79,885 = 99,835 M1 A1 M1 M1 M1

Gross profit as a percentage of net sales = 100% x Gross profit / Net sales = 100% x 99,835 / 179,720 = 55.6% (c) Total overhead expenses = Sum of five expenses = 9,360 + 540 + 1,030 + 8,650 + 8,600 = 28,180 Overhead expenses as a percentage of net sales = O/H expenses / Net sales x 100% = 100% x 28,180 / 179,720 = 15.7% (d) Average stock = x(12,000 + 14,400) = 13,200 Average time in stock = 365 x Average stock / COGS = 365 x 13,200 / 79,885 = 60.3 = 60 days (e) Net profit = gross profit overhead expenses = 99,835 - 28,180 = 71,655 A1 M1 M1 A1 M1 A1 (Total 13 marks) A1 M1

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QUESTION 5 Investment project A has a cost of 100,000 and a projected payback period of 3 years and 2 months. The expected net cash inflow in the first 3 years is 30,000 per year. (a) Calculate the expected net cash inflow for investment project A in year 4. (3 marks) Investment project B has a discount factor for a particular year of 0.683 and an expected net present value for that year of 105,865. (b) Calculate the expected net cash inflow for investment project B for that year. (2 marks) In year 1, investment project B has an expected net cash inflow of 80,000 and an expected net present value of 72,720. Calculate: (c) (d) the discount factor used for year 1 (2 marks) the rate of return used in the calculation, showing your workings. (2 marks) Investment project B has a total expected net present value of negative 4,800 (-4,800) at a rate of return of 9% and negative 68,800 (-68,800) at a rate of return of 11%. (e) Calculate the internal rate of return. (3 marks) (Total 12 marks)

MODEL ANSWER TO QUESTION 5 Syllabus Topic 5: Investment appraisal (5.2), (5.4) and (5.5) (a) Still required to payback in year 4 = 100,000 3 x 30,000 = 10,000 Expected net cash inflow in year 4 = 10,000 x 12 months / 2 months = 60,000 (b) (c) (d) Net cash inflow = 105,865 / 0.683 = 155,000 Discount factor = 72,720 / 80,000 = 0.909 Inverse of discount factor = 1 / 0.909 = 1.1001 Rate of return = 10% (e) Internal rate of return = 0.09 x (-68,800) 0.11 x (-4,800) = 0.0885 = 8.85% -68,800 (-4,800) M1 M1 A1 M1 A1 M1 A1 M1 A1r M1 M1 A1 (Total 12 marks)

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QUESTION 6 Ursula is owed 7,400 by Trader X, who is declared bankrupt. Ursula finds she is an unsecured creditor and eventually receives only 1,184 in payment. Calculate: (a) (b) (c) the rate in the which is payable to unsecured creditors (2 marks) the amount received by an unsecured creditor who is owed 5,750 (2 marks) the amount owed to an unsecured creditor who is paid 2,880 (2 marks) The total owed to unsecured creditors by Trader X is 220,500 He also owes 26,000 to secured creditors The expenses of winding up the business are 5,260 (d) (e) Calculate the value of the traders assets achieved at liquidation. (3 marks) Express this value of the assets as a percentage of the liabilities before liquidation. (3 marks) (Total 12 marks)

MODEL ANSWER TO QUESTION 6 Syllabus Topic 6: Bankruptcy (6.2), (6.3) and (6.4) (a) (b) (c) (d) Rate in the = 1 x 1,184 / 7,400 = 0.16 Creditor receives 5,750 x 0.16 = 920 Owed to creditor = 2,880 / 0.16 = 18,000 Total paid to unsecured creditors = 220,500 x 0.16 = 35,280 Total assets = 35,280 + 26,000 + 5,260 = 66,540 (e) Total liabilities = 220,500 + 26,000 = 246,500 Assets / liabilities = 66,540 / 246,500 = 0.2699 = 27% M1 A1 M1 A1 M1 A1 M1 M1 A1 M1 M1 A1 (Total 12 marks)

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QUESTION 7 A factory machine that costs 3,700,000 is expected to have a life of 6 years. The value of the machine after 3 years is estimated to be 1,750,000. Depreciation for the first 3 years is calculated on the basis of the equal instalment method. Calculate: (a) (b) (c) the amount of depreciation each year (3 marks) the book value after 2 years (2 marks) the first year depreciation as a percentage of the original cost. (2 marks) After 3 years the method of depreciation is changed. From that point onward, depreciation is calculated on the basis of the diminishing balance method, with an annual rate of depreciation of 40% of the machines value at the start of that year. Calculate: (d) (e) (f) the amount of depreciation for year 4 (2 marks) the book value after 4 years (2 marks) the scrap value after 6 years. (2 marks) (Total 13 marks)

MODEL ANSWER TO QUESTION 7 Syllabus Topic 7: Depreciation of Business Assets (7.2) and (7.3) (a) Depreciation over the first 3 years = 3,700,000 - 1,750,000 = 1,950,000 Depreciation in each of the first 3 years = 1,950,000 / 3 = 650,000 (b) (c) (d) (e) (f) Book value after 2 years = 3,700,000 2 x 650,000 = 2,400,000 First year depreciation percent = 650,000 / 3,700,000 = 0.1757 = 17.6% Depreciation during year 4 = 40% x 1,750,000 = 700,000 Book value after 4 years = 1,750,000 - 700,000 = 1,050,000 Scrap value = 1,750,000 x 0.6 = 378,000
3

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

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Education Development International plc 2011

QUESTION 8 Three investments, A, B and C, are grouped into a single fund with weightings of 145, 156 and 99 respectively. Over a period of 4 years they increase in value, with each increase expressed as an index, as shown in the following table: Investment A B C (a) Index 154 145 130 Weighting 145 156 99

Calculate the composite (weighted) index for the three investments combined. (5 marks)

A second fund includes the same three investments, A, B and C, together with a fourth investment D. The weightings of investments A, B and C are as above, and the weighting of investment D is 50. Over the same period, the weighted index of the four investments combined is 141.6. (b) Calculate the index representing the increase in value of investment D, over the four-year period. (5 marks) Working on the basis of simple interest, calculate the percentage increase per annum in investment A over the period. (2 marks)

(c)

MODEL ANSWER TO QUESTION 8 Syllabus Topic 8: Index numbers (8.4) (a) Investment A B C Index 154 145 130 Totals Weighting 145 156 99 400 WxI 22,330 22,620 12,870 57,820 M1

M1 M1 M1 A1 M1 M1 M1 M1 A1

Weighted index = 57,820 / 400 = 144.55 = 145 (b) New total weighting = 400 + 50 = 450 New total (Weight x Index) = 450 x 141.6 = 63,720 For investment D, W x I = 63,720 57,820 = 5,900 Index of investment D = 5,900 / 50 = 118 Syllabus Topic 1: Simple and compound interest (1.2) (c) Percentage increase = (154 100) % / 4 = 13.5%

M1 A1 (Total 12 marks)

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(Total 12 marks)

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