Advanced

Business
Calculations
Level 3

Model Answers
Series 4 2004 (Code 3003)

ASP M 1692
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Advanced Business Calculations Level 3

Series 4 2004

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Model Answers

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Advanced Business Calculations

Series 4 2004
QUESTION 1 (Compulsory)
(a) Calculate the principal that will earn a total of 3,255 simple interest in 4 years at 5%
per annum.
(3 marks)
(b) An investment account of 22,000 attracts 6.55% compound interest per annum. How much will
be in the account after 3 years if the interest is compounded annually?
(4 marks)
(c) How much more interest would have been earned if the interest had been compounded
six-monthly?
(5 marks)
(Total 12 marks)

Model Answer to Question 1

(a) P = 100I
RT
P = 100 x 3,255 = 15,500
5.25 x 4
(b) A = P(1 +

R
100

)T

A = 22,000(1 +

6.55
100

)3 = 22,000 x 1.06553 = 26,612.34

(c) Number of time periods = 2 x 3 = 6

Interest per time period = 6.55% 2 = 3.275%
A = 22,000(1 +

3.275
100

)6 = 22,000 x 1.032756 = 26,692.79

Additional interest = 26,692.79 - 26,612.34 = 80.45

QUESTION 2
A factory manufactures two main products.
Product X has average unit costs of production during a trading year as follows:

Components
Labour
Production overheads
Distribution expenses

84
125
105
60

The production overheads do not vary irrespective of how many units are produced.
55% of the distribution expenses vary directly with the number of units produced.
80% of the labour costs vary directly with the number of units produced.
All the cost of the components varies directly with the number of units produced.
(a) Calculate:
(i)
(ii)

the variable cost per unit

the fixed cost per unit for the trading year.

(3 marks)
(3 marks)

Product Y has fixed costs of 3,250,000 and variable costs per unit of 210 during a trading year. It is
sold to wholesalers at 275 per unit.
(b) Calculate:
(i)
(ii)

the number of units that must be sold in order to break even

the level of output required to provide a profit of 455,000.

(3 marks)
(3 marks)

(Total 12 marks)

Model Answer to Question 2

(a) (i)
(ii)
(b) (i)

Variable cost per unit = 84 + (80% x 125) + (55% x 60) = 217

Fixed cost per unit = 105 + (20% x 125) + (45% x 60) = 157
Contribution per unit = 275 - 210 = 65
Break-even = Fixed costs contribution
= 3,250,000

(ii)

65 = 50,000 units

Difference in units from break-even = Profit

contribution

= 455,000 65 = 7,000
Required level of output = break-even + 7,000 = 57,000 units

QUESTION 3
100 of 4% government stock can be bought for 83. A bank invested 50,100 in the stock and
held the stock for 3 years.
(a) Calculate the total percentage yield.
(5 marks)
The bank could have invested the 50,100 instead in 6% Preference Shares (nominal value 0.50)
at 3.34 each.
(b) Calculate the interest over the 3 years.
(5 marks)

(Total 10 marks)

Model Answer to Question 3

(a) Nominal value of stock = 50,100 x 100 = 60,000
83.5
Interest received = 60,000 x 4.75% x 3 = 9,975
Percentage yield = 9,975 x 100% = 19.91% = 20%
50,100
(b) Number of shares bought = 50,100 3.34 = 15,000
Nominal value of shares = 15,000 x 0.50 = 7,500
Interest received = 7,500 x 6% x 3 = 1,706.25

QUESTION 4
The following information relates to a retailers business for one year:
Annual credit sales
Annual credit purchases
Sales returns
Purchases returns
Stock at start of year
Stock at end of year
Average money owed by debtors
Average money owed to creditors
Postage and telephone
Heating and lighting
Rent

121,000
87,480
3,500
4,730
5,746
6,006
4,700
4,965
1,500
2,800
14,500

(a) Calculate the ratios for:

(i) overhead expenses
(ii) average credit taken
(iii) average credit given.

(4 marks)
(3 marks)
(2 marks)

(b) Give a brief interpretation of the average credit given by the retailer.
(2 marks)
(c) Calculate the average number of days for which stock is held.
(4 marks)

(Total 15 marks)

Model Answer to Question 4

(a) (i)

Overheads = 1,500 + 2,800 + 14,500 = 18,800

Net sales = 121,000 - 3,500 = 117,500
Ratio for overhead expenses = overheads x 100% = 18,800 x 100%
net sales
117,500
= 16%

(ii)

Net purchases = 87,480 - 4,730 = 82,750

Average credit taken = average creditors x 365 = 4,965 x 365
net purchases
82,750
= 21.9 days

(iii) Average credit given = average debtors x 365 = 4,700 x 365

net sales
117,500
= 14.6 days
(b) Average credit given is
the average period of credit
given to debtors
and is approximately 15 days (or approximately 2 weeks)
(c) Cost of goods sold (COGS) = stock at start + net purchases - stock at end
= 5,746 + 82,750 - 6,006 = 82,490
Average stock at cost price = (stock at start + stock at end)
= (5,746 + 6,006) = 5,876
Average time in stock = average stock = 5,876 x 365 days = 26 days
COGS
82,490

QUESTION 5
A business owner has a choice of two investment projects. The estimated costs and returns are as
follows (all figures are in ):

Cost
Year 1 cash inflow
Year 2 cash inflow
Year 3 cash inflow
Year 4 cash inflow

Project A

Project B

2,750,000
500,000
900,000
1,100,000
1,000,000

800,000
200,000
400,000
600,000
400,000

(a) Calculate the payback period for each project in years and months and advise the owner.
(7 marks)
Project X is estimated to have a net present value of 42,000 at a discount factor of 12% and a
negative net present value of 63,000, at a discount factor of 13%.
(b) Calculate the internal rate of return of the Project.
(3 marks)
Project Y also has a net present value of 42,000 at a discount factor of 12%. It has an internal rate of
return of 12.7%.
(c) Calculate the net present value of the Project at a discount factor of 13%.
(5 marks)

(Total 15 marks)

Model Answer to Question 5

(a) Cumulative cash inflow ():
Year 1
Year 2
Year 3
Year 4

Project A

Project B

500,000
1,400,000
2,500,000
3,500,000

200,000
600,000
1,200,000
1,600,000

Project A pays back during year 4 and Project B pays back during year 3.
In Y4, Project A pays back after 2,750,000 2,500,000 x 12 months = 3 months
1,000,000
In Y3, Project B pays back after 800,000 200,000 x 12 months = 4 months
600,000
Hence, Payback period of Project A is 3 years 3 months
Payback period of Project B is 2 years 4 months
On the basis of payback period the business owner should choose Project B
(b) IRR = 12% +

42,000
x 1%
42,000 + 63,000

Internal rate of return = 12.4%

(c) Since the IRR is 12.7%, the NPV at 13% will be negative, therefore
IRR = 12.7% = 12% +

42,000
x 1%
42,000 + required NPV

42,000
x 1% = 0.7%
42,000 + required NPV
42,000 = 0.7 x (42,000 + required NPV)
NPV at a discount factor of 13% = (42,000 0.7 x 42,000)/0.7 = 18,000 (negative)

QUESTION 6
A bankrupt business owed 98,000 to fully secured creditors and 112,000 to unsecured creditors.
The assets of the business realised 168,000.
(a) Express the business assets as:
(i)
(ii)

a percentage of the liabilities

a fraction of the liabilities. Give your answer in its simplest terms.

(3 marks)
(1 mark)

(b) Calculate how much in the will be paid to the unsecured creditors.
(3 marks)
In another company bankruptcy, 80 pence in the pound was paid to unsecured creditors.
(c) Calculate:
(i)
(ii)

how much was owed to an unsecured creditor who was paid 16,000
how much was paid to an unsecured creditor who was owed 15,500.

(4 marks)

(Total 11 marks)

Model Answer to Question 6

(a) (i)

Total liabilities = 98,000 + 112,000 = 210,000

Assets as a percentage of the liabilities = Assets x 100%
Liabilities
= 168,000 x 100% = 80%
210,000

(ii)

Assets as a fraction of liabilities

= 168,000 = 4
210,000 5

(b) Total available for unsecured creditors = 168,000 - 98,000 = 70,000

Dividend = 70,000 x 1 = 62.5p
112,000
(c) (i)

Owed to creditor who was paid 16,000 = 16,000 0.8 = 20,000

(ii)

Paid to a creditor who was owed 15,500 = 15,500 x 0.8 = 12,400

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QUESTION 7
A factory machine that cost 560,000 is depreciated by 35% of its value each year using the
diminishing balance method.
(a) Prepare a depreciation schedule for the first 3 years that shows, for each year, the yearly
depreciation, the accumulated depreciation and the book value at the end of the year.
(5 marks)
(b) Giving your answers to the nearest pound, calculate the book value at the end of year 7 and the
amount of depreciation that occurs during year 8.
(5 marks)
(c) Calculate the total depreciation from the end of year 3 to the end of year 7.
(2 marks)

(Total 12 marks)

Model Answer to Question 7

(a)
Initial cost
Year 1
Year 2
Year 3

Annual
depreciation ()

Cumulative
depreciation ()

Book value at
end of year ()

196,000
127,400
82,810

196,000
323,400
406,210

560,000
364,000
236,600
153,790

(b) Book value at the end of Year 7 = 560,000 x (1 0.35)7 = 27,452

Amount of depreciation for Year 8 = 27,452 x 0.35 = 9,608

(c) Total depreciation from end Y3 to end Y7 = 153,790 - 27,452 = 126,338

11

QUESTION 8
A particular item is sold in each of the calendar years 2000 to 2003. In each year the price is held
constant during the year. The following table gives the price in each year and the quantity sold in that
year. The figure for the quantity sold in 2003 is omitted.

Year

2000

2001

2002

2003

Price

3.00

3.39

2.95

3.19

Quantity sold

35,000

33,000

39,600

(a) Calculate the price relative for 2001 with 2000 as the base year.
(2 marks)
(b) Calculate the quantity relative for 2002 with 2001 as the base year.
(2 marks)
(c) Giving each figure correct to one decimal place, show the prices for 2001 to 2003 as a
chain base index.
(5 marks)
(d) The quantity relative for 2003 with 2002 as the base year is 0.97. Calculate the quantity
sold in 2003.
(2 marks)
(e) Provide an interpretation in percentage terms of the quantity relative for 2003 with 2002
as the base year, given in (d).
(2 marks)

(Total 13 marks)

Model Answer to Question 8

(a) Price relative for 2001 based on 2000 = 3.39 / 3.00 = 1.13
(b) Quantity relative for 2002 based on 2001 = 39,600 / 33,000 = 1.2
(c) 2002 chain base index = 100 x 2.95 / 3.39 = 87.02
2003 chain base index = 100 x 3.19 / 2.95 = 108.14
Year

2001

2002

2003

Chain base index

113.0

87.0

108.1

(d) Quantity sold in 2003 = 0.97 x 39,600 = 38,412

(e) Sales fell by 3% from 2002 to 2003.

12