LCCI International Qualifications

Advanced Business
Calculations
Level 3

Model Answers
Series 2 2009 (3003)

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Advanced Business Calculations Level 3
Series 2 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) Questions – reproduced from the printed examination paper

(2) Model Answers – 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)

(3) Helpful Hints – where appropriate, additional guidance relating to individual

questions or to examination technique

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.

Page 1 of 9
QUESTION 1

Simone has a bank account on which simple interest is earned at 2½% per annum on credit
balances. The bank charges simple interest of 6¾% per annum on debit balances.

Interest is calculated at the end of each day on all balances and paid/earned at the end of the month.

Simone’s bank statement for April 2008 is shown below. Two of the balance figures are omitted.

Date Details Debit Credit Balance

£ £ £
31 Mar/1 Apr Balance b/f ?
7 Apr Cheque 327.41 1,808.12 Cr
20 Apr Cheque 2,499.00 ?
25 Apr Cheque 3,654.50 2,963.62Cr

(a) Calculate

(i) the balance brought forward from 31 March (2 marks)

(ii) the balance at the end of the period 20 April to 24 April. (2 marks)

(b) Giving your answer correct to four significant figures, calculate the percentage rate of interest per
day payable by the bank to Simone on credit balances.
(2 marks)

Simone uses the ‘products method’ to check the interest she receives from the bank.

(c) Calculate the interest received by Simone for the period from 7 April to 19 April inclusive.
(2 marks)

Simone’s house increases in value from £105,000 to £185,000 over a period of 10 years.

(d) Calculate the steady rate of compound interest that this represents. (4 marks)

(Total 12 marks)

MODEL ANSWER TO QUESTION 1

(a) (i) Balance carried forward = £1,808.12 + £327.41 = £2,135.53

(ii) Balance from 7 to 24 April = £1,808.12 - £2,499.00 = -£690.88 = £690.88 Dr

(b) Rate per day = 2.5% / 365 = 0.006849% (4sf)

(c) Interest = 13 days x £1,808.12 x 0.006849% = £1.61

T
(d) A = P (1 + R)
10
185,000 = 105,000(1 + R)
10
(1 + R) = 185,000/105,000 = 1.761905
1/10
(1 + R) = 1.761905 = 1.05827

R = 1.05827 – 1 = 0.05827 = 5.8%

3003/2/09/MA Page 2 of 9
QUESTION 2

Company A issued 150,000 shares and sold them at £4.50 each.

(a) Calculate the amount raised. (2 marks)

Some time later, the 150,000 shares were valued at £817,500 in total.

(b) Calculate the value of one share at that time. (2 marks)

Investor B bought £120,000 (nominal value) of stock in Company C at £88.50 per £100 block.

(c) Calculate the amount invested. (2 marks)

Investor B held the stock for 4 years, and received interest of 3% per annum on the nominal value of
the stock.

(d) Calculate:

(i) The total interest earned (2 marks)

(ii) The total percentage yield on the amount invested. (2 marks)

Investor D bought 25,000 units in a unit trust and sold them later at £17.52 each, the total amount
being £80,500 more than she bought them for.

(e) Calculate the original amount paid per unit by investor D. (3 marks)

(Total 13 marks)

MODEL ANSWER TO QUESTION 2

(a) Amount raised = 150,000 x £4.50 = £675,000

(b) Value of one share = £817,500/150,000 = £5.45

(c) Amount invested = £120,000 x £88.50/£100 = £106,200

(d) (i) Total interest earned = £120,000 x 4 x 3% = £14,400

(ii) Total percentage yield = 100% x £14,400/£106,200 = 13.56%

(e) Total selling price = 25,000 x £17.52 = £438,000

Original amount paid = £438,000 - £80,500 = £357,500

Original amount paid per unit = £357,500/25,000 = £14.30

3003/2/09/MA Page 3 of 9
QUESTION 3

An industrial product can be manufactured by two different methods of production.

Using Method A, fixed costs are £9,060,000 and variable costs are £19 per unit of product. Using
Method B, fixed costs are £7,920,000.

At an output of 240,000 units, the total costs for Method B are the same as for Method A.

(a) Calculate the variable cost per unit of product for Method B. (4 marks)

The manufacturer chooses Method A and sets a selling price so that it will break even on production
and sales of 600,000 units.

(b) Calculate the selling price and the contribution per unit of product. (4 marks)

The manufacturer makes a profit of £2,265,000. All units produced are sold.

(c) Calculate the level of production and sales. (3 marks)

(Total 11 marks)

MODEL ANSWER TO QUESTION 3

(a) Method A total costs = £9,060,000 + 240,000 x £19 = £13,620,000

Method B variable costs = £13,620,000 - £7,920,000 = £5,700,000

Method B unit variable costs = £5,700,000/240,000 = £23.75

(b) Contribution per unit = £9,060,000/600,000 = £15.10

Selling price = £19 + £15.10 = £34.10

(c) Additional units sold above break even = Profit/Contribution

= £2,265,000/15.10 = 150,000

Level of production and sales = 600,000 + 150,000 = 750,000

3003/2/09/MA Page 4 of 9
QUESTION 4

The following information relates to the business of Retailer R during a trading year.

£
Net sales 1,305,000
Cost of goods sold 646,000
Initial stock value 39,900
Final stock value 36,100
Overhead expenses 424,100

Calculate:

(a) net profit as a percentage of net sales (4 marks)

(b) net purchases (2 marks)

(c) rate of stockturn per annum (3 marks)

(d) the average number of days items are held in stock. (2 marks)

In the same year, the cost of goods sold by Retailer S were £850,000. During the year the retailer
reduced stock by £20,000, and kept items in stock for an average of 14.6 days.

(e) Calculate the value of stock at the end of the year. (4 marks)

(Total 15 marks)

MODEL ANSWER TO QUESTION 4

(a) Gross profit = Net sales – COGS = £1,305,000 – £646,000 = £659,000

Net profit = Gross profit – Overhead expenses = £659,000 - £424,100 = £234,900

Net profit percent = 100% x £234,900/£1,305,000 = 18%

(b) Net purchases = COGS – opening stock + closing stock

= £646,000 – £39,900 + £36,100 = £642,200

(c) Average stock = ½ (£39,900 + £36,100) = £38,000

Rate of stockturn = COGS / Average stock

= £646,000/£38,000 = 17 times per annum

(d) Average number of days items are held in stock = 365/17 = 21.5 days

(e) Rate of stockturn = 365/14.6 = 25

Average stock = £850,000/25 = £34,000

Final stock = £34,000 - £20,000/2 = £24,000

3003/2/09/MA Page 5 of 9
QUESTION 5

Investor A uses the following formula to calculate the average rate of return (ARR):

ARR = Average return per annum net of repairs and maintenance

Initial cost of project

She estimates the following figures for investment project X:

Initial cost of project £6,400,000

Expected life of project 5 years
Total return before allowing repairs and maintenance £10,000,000
Average cost per annum of repairs and maintenance £208,000

(a) Estimate the average rate of return of project X. (4 marks)

Investor B uses the same formula and estimates that project Y has an initial cost of £5,000,000, an
expected life of 6 years, a total return before allowing for repairs and maintenance of £9,000,000, and
an average rate of return of 23%.

(b) Calculate the estimated average cost per annum of repairs and maintenance. (4 marks)

Investor C estimates that the cost of project Z is £8,800,000, and that it will earn a return of
£2,400,000 per annum.

(c) Calculate the expected payback period of project Z in years and months. (3 marks)

(Total 11 marks)

MODEL ANSWER TO QUESTION 5

(a) Average return per annum before allowing for repairs and maintenance

= £10,000,000/5 = £2,000,000

Average return per annum after allowing for repairs and maintenance

= £2,000,000 - £208,000 = £1,792,000

Average rate of return = £1,792,000/£6,400,000 = 0.28 = 28%

(b) Average return per annum before allowing for repairs and maintenance

= £9,000,000/6 = £1,500,000

Average return per annum after allowing for repairs and maintenance

= 23% x £5,000,000 = £1,150,000

Estimated average cost per annum of repairs and maintenance

= £1,500,000 - £1,150,000 = £350,000

2
(c) Payback period = £8,800,000/£2,400,000 = 3 /3

= 3 years 8 months

3003/2/09/MA Page 6 of 9
QUESTION 6

A bankrupt trader owed £29,750 to fully secured creditors and £171,500 to unsecured creditors.

The assets of the business realised £73,500.

Calculate

(a) the ratio of business assets to total liabilities, giving your answer in its lowest terms (3 marks)

(b) how much was paid to the fully secured creditors (1 mark)

(c) how much was paid to the unsecured creditors (2 marks)

(d) how much in the £ was paid to the unsecured creditors, giving your answer correct to three
figures
(3 marks)

(e) how much was paid to an unsecured creditor who was owed £4,400 (2 marks)

(f) how much was owed to an unsecured creditor who was paid £51. (2 marks)

(Total 13 marks)

MODEL ANSWER TO QUESTION 6

(a) Total liabilities = £29,750 + £171,500 = £201,250

Assets : liabilities = 73,500 : 201,250 = 42 : 115

(b) Paid to fully secured creditors = £29,750

(c) Paid to unsecured creditors = £73,500 - £29,750 = £43,750

(d) Rate payable = £1 x £43,750/£171,500 = £0.255102 = 25.5p in the £

(e) Amount paid = £4,400 x 0.255 = £1,122

(f) Amount owed = £51/0.255 = £200

3003/2/09/MA Page 7 of 9
QUESTION 7

A factory machine that cost £750,000 is depreciated by 55% of its value each year using the
diminishing balance method.

(a) Prepare a depreciation schedule for the first 2 years that shows, for each year, the yearly
depreciation, the accumulated depreciation and the net book value at the end of the year.
(5 marks)

(b) Calculate the amount of depreciation that occurs during year 6. (4 marks)

A second machine also costs £750,000, and is depreciated by the equal instalment method with a
lifetime of 5 years and a scrap value of £10,000.

(c) Calculate the net book value at the end of year 3. (4 marks)

(Total 13 marks)

MODEL ANSWER TO QUESTION 7

(a) Depreciation table. All figures in £.

Year Yearly Cumulative Book Value at

Depreciation Depreciation Year End
0 750,000
1 412,500 412,500 337,500
2 185,625 598,125 151,875

(b) 1 – rate of depreciation = 1 – 0.55 = 0.45

5
Book value at the end of year 5 = £750,000 x 0.45 = £13,840

Depreciation in year 6 = 0.55 x £13,840 = £7,612

(c) Total depreciation = £750,000 - £10,000 = £740,000

Annual depreciation = £740,000/5 = £148,000

Book value at end of year 3 = £740,000 – 3 x £148,000 = £296,000

3003/2/09/MA Page 8 of 9
QUESTION 8

An index of industrial productivity has the following values over the period 2004 to 2008, with 2004 as
the base year.

2004 2005 2006 2007 2008

100 105.4 109.2 120.7 115.3

(a) Express these figures as a chain base index. (5 marks)

(b) State the percentage change in industrial productivity from 2007 to 2008. (2 marks)

(c) Calculate the quantity relative for 2008 with 2006 as the base year. (2 marks)

(d) Write your answer to (c) as an index. (1 mark)

The industrial productivity for 2004 was an increase of 8% on the previous year.

(e) Calculate the index figure for 2006 with 2003 as the base year. (2 marks)

(Total 12 marks)

MODEL ANSWER TO QUESTION 8

(a) 100 x 109.2/105.4 = 103.6

2005 2006 2007 2008

105.4 103.6 110.5 95.5

(b) Productivity has fallen by 4.5%.

(c) Quantity relative = 115.3/109.2 = 1.056

(d) Quantity index = 105.6

(e) Index for 2006 = 1.08 x 109.2 = 117.9

3003/2/09/MA Page 9 of 9 © Education Development International plc 2009

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