Advanced Business Calculations

Level 3

Model Answers
Series 2 2006 (Code 3003)

1 3003/2/06

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Advanced Business Calculations Level 3

Series 2 2006

How to use this booklet Model Answers have been developed by Education Development International plc (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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3003/2/06/MA

QUESTION 1 (a) Calculate the amount (principle plus interest) when a sum of 200,000 is invested at 4.5% per annum simple interest for three-and-a-half years. (b) At the start of the year 2000 a house was worth 200,000. Each year for the next 5 years the house increased in value at a rate of 4.5% per annum of its value at the start of the year. Treating the increase in value as compound interest, calculate: (i) (ii) the value of the house after 3 years the value of the house after 2 years

(iii) the value of the house after the first year

(c) The value of a second house increased at the same rate per annum over the same 5 year period. At the end of the 5 years its value was 350,000. Giving your answer correct to the nearest 1,000, calculate the value of the house at the start of the period. (Total 12 marks)

3003/2/06/MA

MODEL ANSWER TO QUESTION 1 (a) Interest = PRT = 200,000 x 4.5 x 3.5 = 31,500 100 100 Amount = 200,000 + 31,500 = 231,500

(b)

(i)

Value of house after 3 years = (1 + 0.045) x 200,000 = 228,233.23

(ii)

Value of house after 2 years = (1 + 0.045)2.5 x 200,000 = 223,265.04

(iii)

Value of house after 1 year = (1 + 0.045) x 200,000 = 209,000

(c)

Value of house at the start of the period = 350,000 (1 + 0.045)5 = 280,857.87 = 281,000

3003/2/06/MA

QUESTION 2 100 nominal value of 3% government stock can be bought for 94. A bank invested 171,080 in the stock. (a) Calculate the nominal value of the stock bought by the bank.

The bank held the stock for 5 years. (b) Calculate the interest received over this period.

The bank could have purchased 188,000 nominal value of debenture stock for the 171,080.

(c) Calculate the cost of 100 nominal value of the debenture stock. The bank could have invested the 171,080 instead in a unit trust at an offer price of 20 per unit, and sold the units after 5 years at 23.92 per unit.

(d) Calculate the number of units that could have been purchased.

(e) Comparing interest on stock with profit on units, calculate how much less the bank would have received if it had invested in the units trusts instead of government stock. (Total 11 marks)

3003/2/06/MA

MODEL ANSWER TO QUESTION 2

(a)

Nominal value = 171,080 x 100/94 = 182,000

(b)

Interest received = 182,000 x 5 x 3.75% = 34,125

(c)

Cost of 100 nominal value of debenture stock = 100 x 171,080

188,000 = 91

(d)

Number of units = 171,080

20 = 8,554 units

(e)

Profit on 1 unit = 23.92 - 20 = 3.92 Profit on units = 8,554 x 3.92 = 33,531.68 Difference = 34,125 - 33,531.68 = 593.32

3003/2/06/MA

QUESTION 3 Manufacturer A sells a particular product for 330. Costs are as follows: Fixed cost 2,700,000 per period Variable costs 285 per unit (a) Calculate the break-even point in units per period Manufacturer B sells a similar product. By investing in newer machinery, fixed costs are increased to 3,400,000 per period while variable costs are reduced to 250 per unit. This product is sold for 309 per unit. (b) Calculate the level of production per period for which the two methods have the same total costs. (c) Compare the profits of the two manufacturers for production and sales of 75,000 units per period (d) Calculate the level of production and sales per period for which the two methods produce the same profit or loss. (Total 14 marks)

3003/2/06

MODEL ANSWER TO QUESTION 3 (a) Contribution = 330 - 285 = 45 per unit Break-even point = Fixed cost contribution/unit = 2,700,000 45 = 60,000 units

(b)

A total cost = B total cost 2,700,000 + 285 x Q = 3,400,000 + 250 x Q Q = 700,000 35 = 20,000 units

(c)

Profit A = 75,000 x 45 - 2,700,000 = 675,000 Contribution B = 309 - 250 = 59 per unit Profit B = 75,000 x 59 - 3,400,000 = 1,025,000 Manufacturer Bs profit is 1,025,000 - 675,000 = 350,000 greater

(d)

A profit = B profit 45 x Q 2,700,000 = 59 x Q 3,400,000 Q = 700,000

14 = 50,000 units

3003/2/06

QUESTION 4 At the end of the year 2005 the current ratio for Company X was 3.5:1 and its current liabilities were 6,200,000. (a) Calculate the current assets for Company X at that time. Also at the end of the year 2005, the same company, Company X, had an acid test ratio of 3:1. (b) Calculate the stock held by Company X at that time. (c) State whether you think the liquidity of Company X is healthy or not. Explain your answer.

(d) The rate of stockturn for Company Y in the year 2005 was 8. At the start of that year the company held stock to the value of 212,000, and at the end of that year the value of stock held was 197,000. Calculate the net purchases of Company Y for that year. (Total 13 marks)

3003/2/06

MODEL ANSWER TO QUESTION 4 (a) Current assets = Current ratio x current liabilities = 3.5 x 6,200,000 = 21,700,000

(b)

Current assets minus stock = Acid test ratio x current liabilities = 3 x 6,200,000 = 18,600,000 Stock = 21,700,000 - 18,600,000 = 3,100,000

(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 ratios are a lot higher than these advisory targets, and therefore the assets of the company could be better used

(d)

Average stock = (212,000 + 197,000)

2 = 204,500

CoGS = Rate of stockturn x average stock = 8 x 204,500 = 1,636,000 Net purchases = CoGS opening stock + closing stock = 1,636,000 - 212,000 + 197,000 = 1,621,000

3003/2/06

10

QUESTION 5 The estimated cost and returns for investment project A are as follows: 5,000,000 1,000,000 2,500,000 3,000,000 1,000,000

Initial investment cost Year 1 net cash inflow Year 2 net cash inflow Year 3 net cash inflow Year 4 net cash inflow

(a) Calculate the payback period of project A in years and months.

The potential investor for project A requires a payback period of 3 years or better. (b) Advise the potential investor for project A.

The investor estimates the following figures for investment project B: Initial cost of project Expected life of project Total return before allowing for repairs and maintenance Average cost per annum of repairs and maintenance (c) Calculate the average rate of return of project B. Investment project C is estimated to have a net present value of 250,000 at a discount factor of 11% and a net present value of 50,000 at a discount factor of 12%. (d) Calculate the internal rate of return of the Project. (Total 13 marks) 7,000,000 7 years 17,500,000 400,000

3003/2/06

11

MODEL ANSWER TO QUESTION 5 (a) Project A: After 2 years amount not yet paid back = 5,000,000 1,000,000 2,500,000 = 1,500,000 As a fraction of inflow in year 3 = 1,5000,000 3,000,000 = year Payback period = 2 years 6 months

(b)

The payback period of project A is expected to be shorter than that required. Therefore the investor should proceed with the project.

(c)

Project B: Average return per annum = 17,500,000

7 = 2,500,000

Net of repairs &c = 2,500,000 - 400,000 = 2,100,000 Average rate of return = 2,100,000 7,000,000 = 0.3 = 30% (d) Project C: Internal rate of return = 12% x 250,000 11% x 50,000 = 12.25% 250,000 - 50,000

3003/2/06

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QUESTION 6 The following table summarises the bankruptcy of 2 businesses. Company K Assets Total assets available for creditors Liabilities Total owed to secured creditors Total owed to unsecured creditors Total liabilites Distribution of Assets Assets available for unsecured creditors Rate in paid to unsecured creditors Paid to an unsecured creditor who is owed 26,000 Copy and complete the above table. (Total 12 marks) 446,000 320,000 ? 600,000 ? ? ? L ? ? 46,000 61,500 ? 37.5p ?

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MODEL ANSWER TO QUESTION 6

Company

L 32,750 15,500 46,000 61,500 17,250 37.5p 9,750

Assets Total assets available for creditors Liabilities Total owed to secured creditors Total owed to unsecured creditors Total liabilities Distribution of Assets Assets available for unsecured creditors Rate in paid to unsecured creditors Paid to an unsecured creditor who is owed 26,000 Company K:

446,000 320,000 280,000 600,000 126,000 45p 11,700

Total owed to unsecured creditors = 600,000 - 320,000 = 280,000 Assets available for unsecured creditors = 446,000 - 320,000 = 126,000 Rate in paid to unsecured creditors = 1 x 126,000 280,000 = 0.45 Paid to an unsecured creditor who is owed 52,000 = 0.45 x 26,000 = 11,700 Company L: Assets available for unsecured creditors = 0.375 x 46,000 = 17,250 Total owed to secured creditors = 61,500 - 46,000 = 15,500 Total assets available for creditors = 15,500 + 17,250 = 32,750 Paid to an unsecured creditor who is owed 52,000 = 0.375 x 26,000 = 9,750

3003/2/06

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QUESTION 7 A factory machine that costs 650,000 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. (b) Using the diminishing balance method of depreciation, calculate the annual rate of depreciation. (c) Using the diminishing balance 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. (Total 14 marks)

3003/2/06

MODEL ANSWER TO QUESTION 7 Annual depreciation = (650,000 25,000) 5 = 125,000 Annual depreciation () Initial cost Year 1 Year 2 Year 3 Year 4 Year 5 Cumulative depreciation () Book value at end of year () 650,000 525,000 400,000 275,000 150,000 25,000

(a)

125,000 125,000 125,000 125,000 125,000

125,000 250,000 375,000 500,000 625,000

(b)

25,000
5

650,000 = 0.0384615
= 0.5212

0 . 0384615

Annual rate of depreciation = 1 0.5212 = 0.4788

(c)

Yearly depreciation () Initial cost Year 1 Year 2 Year 3 Year 4 Year 5

Cumulative depreciation ()

Book value end of year () 650,000 338,780 176,572 92029 47,966 25,000

311,220 162,208 84,543 44,063 22,966

311,220 473,428 557,971 602,034 625,000

3003/2/06

QUESTION 8 Company A sell Product P with the following selling prices and units sold Year Price()/unit Units sold 2002 7.50 55,000 2003 7.05 66,000 2004 6.00 69,300

(a) Calculate the price relative for Product P for year 2004 with year 2003 as the base year.

(b) Calculate the index of prices for Product P for the years 2002 to 2004 with year 2002 as the base year.

(c) Calculate a chain base index for the units sold of Product P for the figures shown.

The price relative for Product P for year 2005 with year 2004 as the base year was 1.15, while the quantity sold increased by 1,700 from year 2004 to year 2005. (d) Calculate the total income from the sales of Product P in year 2005 as a percentage of the total income from sales of Product P in year 2004.

(Total 11 marks)

3003/2/06

MODEL ANSWER TO QUESTION 8 (a) Price relative = 6.0

7.05 = 0.85

(b)

Price indices: year 2002 = 100 year 2003 = 100 x 7.05

7.50 = 94

year 2004 = 100 x 6.00 7.50 = 80

(c)

Chain base sales index for year 2003 = 100 x 66,000/55,000 = 120 Chain base sales index for year 2004 = 100 x 69,300/66,000 = 105

(d)

Unit sales in 2005 = 69,300 + 1,700 = 71,000 Required percentage = 1.15 x 71,000 x 100% = 117.8% 69,300

3003/2/06

Education Development International plc 2006