Model Answers Series 4 2011 (3003)

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LCCI International Qualifications

Advanced Business Calculations Level 3

3003/4/11/MA Page 1 of 10

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) 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 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

3003/4/11 Page 2 of 12

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) (b) 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) 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)

(d) 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) MODEL ANSWER TO QUESTION 1 Syllabus Topic 1: Simple and compound interest (1.2) and (1.3) (a) Rate of interest =2.5% A1 (b) √1.05 = 1.024695 M1 Rate of interest = 2.47% A1 (c) Simple interest = 3% x 2 x 4 x £500 = £120 M1 A1 (d) Number of time periods = 2 x 4 = 8 M1 Amount (principal + interest) = £500 x (1.03)8 = £633.385 M1 Interest = £633.385 - £500 = £133.385 = £133.39 A1 A1r Syllabus Topic 8: Index numbers (8.2) (e) Index = 100 x (1.03)8 = 126.7 M1 A1

(Total 11 marks)

3003/4/11 Page 3 of 12

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) the number of units purchased

(2 marks) (b) the percentage yield per annum

(3 marks) (c) 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) the total charges paid

(2 marks) (e) the total charges as a percentage of the original investment

(2 marks) (f) Sinita’s income net of fees.

(2 marks)

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

(Total 13 marks)

3003/4/11 Page 4 of 12

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) the selling price per unit of product

(2 marks) (b) 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) the variable cost per unit

(3 marks) (d) the contribution per unit

(2 marks) (e) the total cost of manufacturing 12,000 units

(3 marks) (f) 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) Selling price per unit of product = £66,000 / 10,000 = £6.60 M1 A1 (b) Income from sales of 12,000 units = 12,000 x £6.60 = £79,200 M1 A1 (c) Variable cost for manufacture of 10,000 units = £70,000 - £20,000 = £50,000 M1 Variable cost per unit = £50,000 / 10,000 = £5 M1 A1 (d) Contribution per unit = £6.60 - £5 = £1.60 M1 A1 (e) Variable cost of manufacturing 12,000 units = 12,000 x £5 = £60,000 M1 Total cost of manufacturing 12,000 units = £60,000 + £20,000 = £80,000 M1 A1 (f) Number of units for break-even = £20,000 / £1.60 = 12,500 units M1 A1

(Total 14 marks)

3003/4/11 Page 5 of 12

QUESTION 4 The following information relates to a retailer’s business at the end of the first year of trading. £

Annual sales 183,700 Annual purchases 84,590 Sales returns 3,980 Purchases returns 2,305 Initial stock value 12,000 Final stock value 14,400 General expenses 9,360 Postage 540 Telephone & Internet 1,030 Advertising 8,650 Vehicle expenses 8,600

Calculate: (a) the cost of goods sold

(3 marks) (b) gross profit as a percentage of net sales

(3 marks) (c) overhead expenses as a percentage of net sales

(2 marks) (d) the average length of time that items remained in stock, giving your answer in days

(3 marks) (e) the net profit.

(2 marks)

(Total 13 marks)

3003/4/11 Page 6 of 12

MODEL ANSWER TO QUESTION 4 Syllabus Topic 4: Profitability and liquidity (4.2) and (4.3) (a) Net purchases = Annual purchases – purchase returns M1 = £84,590 - £2,305 = £82,285 Cost of goods sold (COGS) = Net purchases + initial stock - final stock M1 = £82,285 + £12,000 - £14,400 = £79,885 A1 (b) Net sales = Annual sales - sales returns = £183,700 - £3,980 = £179,720 M1 Gross profit = Net sales – COGS = £179,720 - £79,885 = £99,835 M1 Gross profit as a percentage of net sales = 100% x Gross profit / Net sales = 100% x £99,835 / 179,720 = 55.6% A1 (c) Total overhead expenses = Sum of five expenses M1 = £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% A1 (d) Average stock = ½ x(£12,000 + £14,400) = £13,200 M1 Average time in stock = 365 x Average stock / COGS M1 = 365 x £13,200 / £79,885 = 60.3 = 60 days A1 (e) Net profit = gross profit – overhead expenses M1 = £99,835 - £28,180 = £71,655 A1

(Total 13 marks)

3003/4/11 Page 7 of 12

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) the discount factor used for year 1

(2 marks) (d) 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 M1 Expected net cash inflow in year 4 = £10,000 x 12 months / 2 months = £60,000 M1 A1 (b) Net cash inflow = £105,865 / 0.683 = £155,000 M1 A1 (c) Discount factor = £72,720 / £80,000 = 0.909 M1 A1 (d) Inverse of discount factor = 1 / 0.909 = 1.1001 M1 Rate of return = 10% A1r (e) Internal rate of return = 0.09 x (-£68,800) – 0.11 x (-£4,800) = 0.0885 = 8.85% M1 M1 A1 -£68,800 – (-£4,800)

(Total 12 marks)

3003/4/11 Page 8 of 12

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) the rate in the £ which is payable to unsecured creditors

(2 marks) (b) the amount received by an unsecured creditor who is owed £5,750

(2 marks) (c) 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) Calculate the value of the trader’s assets achieved at liquidation.

(3 marks) (e) 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) Rate in the £ = £1 x £1,184 / £7,400 = £0.16 M1 A1 (b) Creditor receives £5,750 x 0.16 = £920 M1 A1 (c) Owed to creditor = £2,880 / 0.16 = £18,000 M1 A1 (d) Total paid to unsecured creditors = £220,500 x 0.16 = £35,280 M1 Total assets = £35,280 + £26,000 + £5,260 = £66,540 M1 A1 (e) Total liabilities = £220,500 + £26,000 = £246,500 M1 Assets / liabilities = £66,540 / £246,500 = 0.2699 = 27% M1 A1

(Total 12 marks)

3003/4/11/MA Page 9 of 10 © Education Development International plc 2011

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) the amount of depreciation each year

(3 marks) (b) the book value after 2 years

(2 marks) (c) 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 machine’s value at the start of that year. Calculate: (d) the amount of depreciation for year 4

(2 marks) (e) the book value after 4 years

(2 marks) (f) 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 M1 Depreciation in each of the first 3 years = £1,950,000 / 3 = £650,000 M1 A1 (b) Book value after 2 years = £3,700,000 – 2 x £650,000 = £2,400,000 M1 A1 (c) First year depreciation percent = £650,000 / £3,700,000 = 0.1757 = 17.6% M1 A1 (d) Depreciation during year 4 = 40% x £1,750,000 = £700,000 M1 A1 (e) Book value after 4 years = £1,750,000 - £700,000 = £1,050,000 M1 A1 (f) Scrap value = £1,750,000 x 0.63 = £378,000 M1 A1

(Total 13 marks)

3003/4/11/MA Page 10 of 10 © 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 Index Weighting A 154 145 B 145 156 C 130 99 (a) 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) (c) Working on the basis of simple interest, calculate the percentage increase per annum in investment A over the period.

(2 marks) MODEL ANSWER TO QUESTION 8 Syllabus Topic 8: Index numbers (8.4) (a) Investment Index Weighting W x I A 154 145 22,330 M1 B 145 156 22,620 C 130 99 12,870 Totals 400 57,820 M1 M1 Weighted index = 57,820 / 400 = 144.55 = 145 M1 A1 (b) New total weighting = 400 + 50 = 450 M1 New total (Weight x Index) = 450 x 141.6 = 63,720 M1 For investment D, W x I = 63,720 – 57,820 = 5,900 M1 Index of investment D = 5,900 / 50 = 118 M1 A1 Syllabus Topic 1: Simple and compound interest (1.2) (c) Percentage increase = (154 – 100) % / 4 = 13.5% M1 A1

(Total 12 marks)

3003/4/11/MA Page 11 of 10 © Education Development International plc 2011

(Total 12 marks)

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