LCCI International Qualifications

Advanced Business Calculations Level 3

Model Answers
Series 4 2008 (3003)

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Advanced Business Calculations Level 3

Series 4 2008

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)

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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.

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QUESTION 1 Rajesh deposits 15,000 in a bank account at 4% per annum simple interest. (a) How much interest will Rajesh have earned after 3 years and 56 days? (4 marks) Rajesh deposits a further 15,000 in another account at 4% per annum compound interest, for the same period. Interest is added annually and at the end of the period, and is calculated as compound interest throughout. (b) How much more interest will Rajesh have earned from this account than from the simple interest account? (6 marks) (Total 10 marks)

MODEL ANSWER TO QUESTION 1 (a) 56 days = 56 / 365 years = 0.15342466 years Interest = PRT/100 = 15,000 x 4 x 3.15342466 / 100 = 1,892.05 (b) Amount = Principle x (1 + percentage rate)Number of years Amount = 15,000 x (1.04)3.15342466 = 16,974.80 Interest = 16,974.80 15,000 = 1,974.80 Greater than simple interest by: 1,974.80 - 1,892.05 = 82.75

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QUESTION 2 Amanda buys shares in three companies and later receives a dividend from each. She tabulates the figures as follows: Number of shares Nominal value of one share Buying price per share Brokers commission Total cost of shares, including commission Dividend (percentage of nominal value) Dividend () Supply the missing figures. (Total 12 marks) Company A 3,000 5 11.72 30 ? 6% ? Company B 12,000 ? 3.71 ? 44,545 9.8% 588 Company C ? 5 232p 40 58,040 ? 1,750

MODEL ANSWER TO QUESTION 2 Number of shares Nominal value of one share Buying price per share Brokers commission Total cost of shares, including commission Dividend (percentage of nominal value) Dividend () Company A Total cost of shares = 3,000 x 11.72 + 30 = 35,190 Dividend = 3,000 x 5 x 6% = 900 Company B Brokers commission = 44,545 (12,000 x 3.71) = 25 Nominal value of one share = 588 / (12,000 x 9.8%) = 0.50 Company C Number of shares = (58,040 - 40) / 2.32 = 25,000 Dividend (%) = 1,750 / (25,000 x 5) = 0.014 = 1.4% Company A 3,000 5 11.72 30 35,190 6% 900 Company B 12,000 0.50 3.71 25 44,545 9.8% 588 Company C 25,000 5 232p 40 58,040 1.4% 1,750

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QUESTION 3 An industrial product may be manufactured by two methods of production. Using Method One, fixed costs are 7,770,000 per period and variable costs are 208 per unit. Using Method Two, fixed costs are 8,750,000 per period and variable costs are 180 per unit. (a) Calculate the level of output per period for which the total costs are the same. (4 marks) (b) State the total cost per period for Method One and Method Two at this output. (2 marks) (c) Using the information provided and your answer to (a) above, state which of the two methods of production will be cheaper for an output of 50,000 units per period. Explain your answer. (2 marks) Method Two is chosen for production, and the product is sold at 250 per unit. (d) Calculate the total income from sales at break-even. (4 marks) (Total 12 marks)

MODEL ANSWER TO QUESTION 3 (a) Let Q be the quantity produced per period Total cost for Method One = 7,770,000 + 208Q Total cost for Method Two = 8,750,000 + 180Q For the same total cost: 7,770,000 + 208Q = 8,750,000 + 180Q Q(208 180) = 8,750,000 7,770,000 Output per period = 980,000 / 28 = 35,000 units (b) Total cost per period = 8,750,000 + 180 x 35,000 = 15,050,000 (c) A production level of 50,000 units per period is higher than the output in (a) and therefore the lower variable unit cost of Method Two will make it cheaper than Method One. (d) Contribution per unit = 250 - 180 = 70 Break even: number of units = 8,750,000 / 70 = 125,000 Total cost of sales = 250 x 125,000 = 31,250,000

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QUESTION 4 At the end of the year 2007 the current ratio for Company P was 3.2 : 1. Its current liabilities were 4,750,000. (a) Calculate the current assets for Company P at that time. (2 marks) At the end of the same year, 2007, Company P had an acid test ratio of 3.0 : 1. (b) Calculate the stock held by Company P at that time. (3 marks) (c) State whether you think the liquidity of Company P was healthy or not. Explain your answer. (3 marks) In the previous year, 2006, the rate of stockturn for Company P was 12. At the start of that year the company held stock to the value of 180,000, and at the end of that year the value of stock held was 150,000. (d) Calculate the net purchases of Company P for that year. (4 marks) The actual purchases for Company P during 2006 were 2,175,000. (e) Calculate the difference between this and your answer to (d), and say what this difference represents. (3 marks) (Total 15 marks) MODEL ANSWER TO QUESTION 4 (a) Current assets = 3.2 x 4,750,000 = 15,200,000 (b) Current assets stock = 3.0 x 4,750,000 = 14,250,000 Stock = 15,200,000 - 14,250,000 = 950,000 (c) The current ratio of the company is greater than 2 The acid test ratio of the company is greater than 1 Each of these is good However, the acid test ratio in particular is a lot higher than the advisory targets, and therefore the current assets of the company could be better used. (d) Average stock = (180,000 + 150,000) = 165,000 Net purchases + opening stock closing stock = 12 x 165,000 Net purchases = 1,980,000 180,000 + 150,000 = 1,950,000 (e) Purchases net purchases = purchase returns = 2,175,000 1,950,000 = 225,000 3003/4/08/MA Page 4 of 9

QUESTION 5 A business owner has a choice of 2 investment projects. The estimated costs and returns are as follows: Cost Year 1 Net cash inflow/(outflow) Year 2 Net cash inflow Year 3 Net cash inflow Year 4 Net cash inflow Project One 2,500,000 500,000 1,200,000 1,200,000 600,000 Project Two 2,000,000 (250,000) 1,500,000 1,500,000 150,000 (3 marks) The payback period for Project One is 2 years 8 months. (b) On the basis of payback, advise the business owner which project is the better investment. Give a reason. (2 marks) The business owner requires that the project chosen must earn a return of at least 15%. (c) Using a discount factor of 15%, and the following table, calculate the net present value for Project Two. Discounting factor Year 1 Year 2 Year 3 Year 4 15% 0.870 0.756 0.658 0.572 (5 marks) Using the same discount factor, Project One has a negative net present value of 25,000. (d) Advise the business owner further, with reasons. (2 marks) (e) A business advisor calculates that the internal rate of return for Project One is 15.2%. Without carrying out further calculations, comment on the advisors figure. (2 marks) (Total 14 marks)

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

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MODEL ANSWER TO QUESTION 5 (a) Cumulative cash inflow totals for Project Two: Year 1 (250,000) Year 2 1,250,000 Year 3 2,750,000 Year 4 2,900,000

Payback requires years 1 & 2, plus 750,000 during year 3 Number of months = 12 x 750,000 / 1,500,000 = 6 months Hence, payback period for Project Two is 2 years and 6 months (b) On the basis of payback, Project Two requires a shorter time to payback the original investment, and it therefore preferred. (c) Year 0 Year 1 Year 2 Year 3 Year 4 Project Two Initial cost Cash outflow Cash inflow Cash inflow Cash inflow In/outflow D.F. 15% Present value -2,000,000 - 217,500 1,134,000 987,000 85,800 -10,700

2,000,000 1.000 250,000 0.870 1,500,000 0.756 1,500,000 0.658 150,000 0.572 Net present value =

(d)

Neither project meets the requirement of providing a return of 15%. The business owner is therefore advised not to proceed with either project. As the net present value of the project at 15% is negative, then the internal rate of return must be less than 15%, and the advisors figure for internal rate of return is incorrect.

(e)

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QUESTION 6 The following information relates to the business of a bankrupt trader. Cash in hand Creditors Machinery Bank overdraft Trade debtors Stock Office equipment Vehicles Total assets Total liabilities 105 ? 11,500 25,300 6,090 16,420 ? 17,000 59,140 97,500 (4 marks) The assets were realised in full at their book values, listed above. Creditors include 3,700, which, together with the bank overdraft, are secured. Hence, 29,000 of the liabilities, made up of the bank overdraft and other secured creditors, must be paid first and in full. Calculate: (b) the rate in the that an unsecured creditor will receive. (4 marks) (c) the amount owed to an unsecured creditor who receives 13,420. (2 marks) (Total 10 marks)

(a) Calculate the value of her office equipment and the amount owed to creditors.

MODEL ANSWER TO QUESTION 6 (a) Total assets = (105 + 11,500 + 6,090 + 16,420 + office equipment + 17,000) = 59,140 Value of office equipment = 59,140 51,115 = 8,025 Total liabilities = (creditors + 25,300) = 97,500 Owed to creditors= 97,500 25,300 = 72,200 (b) Assets available for unsecured creditors = 59,140 - 29,000 = 30,140 Owed to unsecured creditors = 97,500 - 29,000 = 68,500 Rate payable = 1 x 30,140 / 68,500 = 0.44 (c) Owed to unsecured creditor who receives 13,420 = 13,420 = 30,500 0.44

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QUESTION 7 A factory machine that costs 350,000 is estimated to have a life of 5 years and a scrap value of 25,000. (a) Using the equal instalment method, prepare a depreciation schedule that shows, for each year, the annual depreciation, the accumulated depreciation and the book value at the end of each year. (6 marks) (b) Using the diminishing balance method of depreciation, calculate: (i) (ii) (iii) (iv) the annual rate of depreciation the depreciation in the first year the book value after 3 years the accumulated depreciation after 3 years. (4 marks) (2 marks) (2 marks) (1 mark) (Total 15 marks)

MODEL ANSWER TO QUESTION 7 (a) Annual depreciation = (350,000 - 25,000)

5 = 65,000

Depreciation schedule () End of year 0 1 2 3 4 5 Annual Depreciation 0 65,000 65,000 65,000 65,000 65,000 Accumulated Depreciation 0 65,000 130,000 195,000 260,000 325,000 Book Value 350,000 285,000 220,000 155,000 90,000 25,000

(b) (i) 25,000 / 350,000 = 0.071428571

5

0.071428571 = 0.5898946

1 0.58989 = 0.4101054 (ii) Depreciation in the first year = 350,000 x 0.4101054 = 143,537

(iii) Book value after 3 years = 350,000 x (1 0.4101054)3 = 71,844 (iv) Accumulated depreciation after 3 years = 350,000 71,844 = 278,156

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QUESTION 8 (a) An index of retail prices at January 2008 is shown below: Group Food Housing Fuel and light Durable household goods Clothing and footwear Transport Weight 150 321 82 199 63 185 Index (Jan 2000 = 100) 134.1 187.8 171.5 115.6 94.3 127.1

A statistician calculates the weighted index for the above table to be 146.9. She wishes to know the effect of the increase in food costs on the index. (i) (ii) Calculate the weighted index for the above items that are not Food. (5 marks) Comment in percentage terms on the change in non-food retail prices in the period from January 2000 to January 2008. (3 marks)

(iii) Comment on any difference between your figure and the statisticians weighted figure above. (2 marks) (b) An index of industrial production is shown below: 2006 (2000 =100) 125 2007 (2006=100) 104 (2 marks) (Total 12 marks) MODEL ANSWER TO QUESTION 8 (a) (i) Group Food Housing Fuel and light Durable household goods Clothing and footwear Transport Weighted index = 126,805.6 / 850 = 149.2 (ii) Retail prices, excluding food, increased by 49.2% between January 2000 and January 2008. Weight 150 321 82 199 63 185 850 Index 134.1 187.8 171.5 115.6 94.3 127.1 60,283.8 14,063.0 23,004.4 5,940.0 23,513.5 126,805.6 WxI

Calculate the index of industrial production for 2007 with 2000 = 100.

(iii) The inclusion of food costs has reduced the index by 2.3% of its 2000 value. (b) Index for 2007 with 2000 as the base year = 104 x 125 / 100 = 130

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