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LCCI International Qualifications

Certificate in Advanced
Business Calculations
Level 3

Model Answers
Series 3 2009 (3003)

For further Tel. +44 (0) 8707 202909


information Email. enquiries@ediplc.com
contact us: www.lcci.org.uk
Certificate in Advanced Business Calculations Level 3
Series 3 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 16
QUESTION 1

Zheng deposited money into three different accounts, as follows:

Account A Account B Account C


Sum invested £80,000 £140,000 ?
Type of interest Simple interest Compound interest Compound interest
Rate of interest 4.5% 4.2% ?
per annum
Time invested (years) ? 5 6
Interest earned £18,000 ? £23,610.35
Final amount ? ? £115,110.35
(Principle + Interest)

Calculate the missing figures.


(Total 12 marks)

MODEL ANSWER TO QUESTION 1

Account A Account B Account C


Sum invested £80,000 £140,000 £91,500
Type of interest Simple interest Compound interest Compound interest
Rate of interest 4.5% 4.2% 3.9%
per annum
Time invested (years) 5 5 6
Interest earned £18,000 £31,975.52 £23,610.35
Final amount £98,000 £171,975.52 £115,110.35
(Principle + Interest)

Account A:

Time invested = £18,000 / (£80,000 x 4.5%) = 5 years

Final amount = £80,000 + £18,000 = £98,000

Account B:
5
Final amount = £140,000 x (1 + 0.042) = £171,975.52

Interest = £171,975.52 - £140,000 = £31,975.52

Account C:

Sum invested = £115,110.35 - £23,610.35 = £91,500

Proportional increase = £115,110.35 / £91,500 = 1.258

Let R = rate of compound interest


6
(1 + R) = 1.258

1 + R = 1.03899

Rate (R) = 3.9%

3003/3/09/MA Page 2 of 16
QUESTION 2

Chelsey bought £75,000 (nominal value) of 3¾% debenture stock with each £100 (nominal value) of
stock costing £90.

(a) Calculate the amount paid for the stock. (2 marks)

She held the stock for 3 years.

(b) Calculate

(i) the total interest earned (2 marks)

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

Chelsey purchased 15,000 5¼% preference shares and received £1,260 dividend in the first year.

(c) Calculate the nominal value of one share. (2 marks)

She received the same dividend in the second year. She then sold the shares for £122,100 and
calculated that this was exactly 10% more than she paid for them.

(d) Calculate the purchase price of one share. (2 marks)

(e) Calculate the percentage profit per annum, based on purchase, sale and dividends. (4 marks)

(Total 14 marks)

3003/3/09/MA Page 3 of 16
MODEL ANSWER TO QUESTION 2

(a) Cost of stock = 0.9 x £75,000 = £67,500

(b) (i) Interest = £75,000 x 3 years x 3¾% = £8,437.50

(ii) Total percentage yield = 100% x £8,437.50 / £67,500 = 12.5%

(c) 15,000 x nominal value x 5¼% = £1,260

Nominal value = £1.60

(d) Cost of shares = £122,100 / (1 + 10%) = £111,000

Cost of one share = £111,000 / 15,000 = £7.40

(e) Profit = £122,100 - £111,000 + £1,260 + £1,260 = £13,620

Profit per annum = £13,620 / 2 = £6,810

Percentage profit per annum = 100% x £6,810 / £111,000 = 6.1%

3003/3/09/MA Page 4 of 16
QUESTION 3

An industrial product may be manufactured by two methods of production.

Using Method X, fixed costs are £1,750,000 per period and variable costs are £295 per unit of
product.

Using Method Y, fixed costs are £1,050,000 per period and variable costs are £335 per unit of
product.

The manufacturer plans to sell the product at £435 per unit.

(a) Calculate:

(i) the level of output per period for which the total costs are the same (3 marks)

(ii) the break even point in units per period for method X (3 marks)

(iii) the total cost per period at break even for method Y. (4 marks)

The manufacturer predicts sales of 20,000 units per period.

(b) State which method should be used. (1 mark)

(c) Calculate the expected profit per period using this method. (3 marks)

(Total 14 marks)

3003/3/09/MA Page 5 of 16
MODEL ANSWER TO QUESTION 3

(a) (i) Let the level of output be Q. Costs will be equal when:

£1,750,000 + £295 x Q = £1,050,000 + £335 x Q

Q = £700,000 / £40 = 17,500 units per period

(ii) Contribution = £435 - £295 = £140

Break even = £1,750,000 / £140 = 12,500 units per period

(iii) Contribution = £435 - £335 = £100

Break even = £1,050,000 / £100 = 10,500 units per period

Cost per period = 10,500 x £435 = £4,567,500

(b) The expected sales are more than the figure calculated in (a)(i), so the manufacturer should
choose the method with the lower cost per unit, that is method X.

(c) Excess of units over break even = 20,000 - 12,500 = 7,500 units per period

Expected profit = 7,500 x £140 = £1,050,000 per period

3003/3/09/MA Page 6 of 16
QUESTION 4

Part of the Balance Sheet of Retailer A at the end of the first year of trading is shown below:

Balance Sheet as at 31 December Year 1


£ £ £
Fixed Assets Figure omitted

Current Assets
stock 8,899
debtors 9,330
bank 2,420
cash 385 21,034

Amounts due within 12 months


trade creditors 8,090

Net current assets 12,944


251,134

Amount due after 12 months


mortgage on premises (88,300)
162,834

(a) Using the above figures from the Balance Sheet, calculate:

(i) Current ratio (2 marks)

(ii) Borrowing ratio (capital gearing ratio) (2 marks)

(iii) Fixed assets. (2 marks)

(b) During 2008 the following information relates to Retailer B.

£
Net sales 500,000
Cost of goods sold 377,700
Initial stock value 15,500
Final stock value 18,500
Overhead expenses 69,900

Calculate:

(i) gross profit (2 marks)

(ii) net purchases (2 marks)

(iii) the rate of stock turnover (stockturn) per annum. (3 marks)

(Total 13 marks)

3003/3/09/MA Page 7 of 16
MODEL ANSWER TO QUESTION 4

(a) (i) Current ratio = Current Assets = 21,034 = 2.6


Current liabilities 8,090

(ii) Borrowing ratio = Total borrowings = 88,300 = 0.54


Net worth 162,834

Or: Borrowing ratio = Total borrowings = 88,300 = 0.35


Net worth + mortgage 251,134

(iii) Fixed assets = £251,134 - £12,944 = £238,190

(b) (i) Gross profit = Net sales – COGS = £500,000 – £377,700 = £122,300

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

= £377,700 – £15,500 + £18,500 = £380,700

(iii) Average stock = ½(15,500 + 18,500) = £17,000

Rate of stockturn = £377,700 / £17,000 = 22.2

3003/3/09/MA Page 8 of 16
QUESTION 5

Ashok calculates the expected average rate of return of investment project X as 28%, using the
formula:

Average revenue return per annum net of repair and maintenance costs
Initial cost of Project

He uses estimated figures as follows:

Initial cost of the project £850,000


Average cost of repairs and maintenance per annum £50,000
Life of the project 5 years

He further estimates that the revenue return before deducting the cost of repairs and maintenance will
be £300,000 for each of the first 4 years.

(a) Using Ashok’s formula, calculate the average revenue return per annum net of repair and
maintenance costs, and hence find the estimated revenue return before deducting the cost of
repairs and maintenance for year 5.
(6 marks)

(b) Bettany estimates the net present value of investment project Y at two discount rates, with the
following results

Discount rate 10% Net present value = £19,000


Discount rate 13% Net present value = £4,000

(i) Use these figures to calculate the internal rate of return


(3 marks)

(ii) Given that the investor requires the project to earn at least 13.5% per annum, advise the
investor whether to proceed with the investment.
(2 marks)

(Total 11 marks)

3003/3/09/MA Page 9 of 16
MODEL ANSWER TO QUESTION 5

(a) Average net revenue return per annum = 28% x £850,000 = £238,000

Total net revenue return = £238,000 x 5 = £1,190,000

Total gross revenue return = £1,190,000 + 5 x £50,000 = £1,440,000

Estimated revenue return for year 5 = £1,440,000 – 4 x £300,000 = £240,000

(b) Internal rate of return = (0.13 x £19,000) – (0.10 x £4,000) = 13.8%


£19,000 - £4,000

(c) The internal rate of return of the project is higher than the required return, so the investor is
recommended to proceed.

3003/3/09/MA Page 10 of 16
QUESTION 6

A bankrupt trader owed a total of £87,600, of which £35,500 is secured against the trader’s assets and
the rest is unsecured.

The assets of the business realised £66,760.

(a) Express the assets as a percentage of the liabilities.


(2 marks)

(b) Calculate how much in the £ will be paid to the unsecured creditors. State the units of your
answer clearly.
(4 marks)

The trader owed Dinara £17,000, of which 25% is secured against assets.

(c) Calculate how much Dinara received.


(5 marks)

(Total 11 marks)

3003/3/09/MA Page 11 of 16
MODEL ANSWER TO QUESTION 6

(a) Assets as a percentage of liabilities = 100% x £66,760 / £87,600 = 76.2%

(b) Owed to unsecured creditors = £87,600 - £35,500 = £52,100

Available for unsecured creditors = £66,760 - £35,500 = £31,260

Rate in the £ = £1 x £31,260 / £52,100 = £0.60

(c) Secured amount owed to Dinara = 25% x £17,000 = £4,250

Unsecured amount owed to Dinara = 75% x £17,000 = £12,750

Paid to Dinara for unsecured debt = 0.6 x £12,750 = £7,650

Total paid to Dinara = £4,250 + £7,650 = £11,900

3003/3/09/MA Page 12 of 16
QUESTION 7

Machine M has an initial cost of £180,000 and is depreciated by the equal instalment method, at the
rate of £25,000 per year until the book value is less than £25,000.

(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.
(4 marks)

(b) Calculate the anticipated life of the machine in a whole number of years, and the residual value at
the end of that period.
(3 marks)

Machine N is depreciated by the diminishing balance method. It has an initial cost of £250,000 and a
book value after one year of £190,000.

(c) Calculate

(i) the rate of depreciation (3 marks)

(ii) the book value after 2 years (2 marks)

(iii) the amount of depreciation expected during year 3. (2 marks)

(Total 14 marks)

3003/3/09/MA Page 13 of 16
MODEL ANSWER TO QUESTION 7

(a) All figures in pounds.

Year Annual Accumulated Book value


depreciation depreciation
0 180,000
1 25,000 25,000 155,000
2 25,000 50,000 130,000
3 25,000 75,000 105,000

(b) Anticipated life of machine = £180,000 / £25,000 = 7.2 = 7 years

Residual value = £180,000 – (7 x £25,000) = £5,000

(c) (i) Proportion of value remaining after one year = £190,000 / £250,000 = 0.76

Rate of depreciation = 1 – 0.76 = 0.24 = 24%

(ii) Book value after 2 years = 0.76 x £190,000 = £144,400

(iii) Depreciation in year 3 = 0.24 x £144,400 = £34,656

3003/3/09/MA Page 14 of 16
QUESTION 8

A company sold 540 spectroscopes in year 2007 and 756 spectroscopes in year 2008.

(a) Calculate the quantity relative for year 2008 with 2007 as the base year. (2 marks)

The price of the spectroscopes fell by 12.5% from year 2006 to year 2007.

(b) Express this change as a price relative. (1 mark)

In year 2008 the company cut the price of its spectroscopes by 10% of the year 2007 price.

(c) Calculate the index of prices for the years 2006 to 2008

(i) as a chain base index (2 marks)

(ii) with the prices for 2007 and 2008 based on 2006 as 100. (3 marks)

(d) Calculate the percentage increase in receipts from sales of spectroscopes from 2007 to 2008.

(3 marks)

(Total 11 marks)

3003/3/09/MA Page 15 of 16
MODEL ANSWER TO QUESTION 8

(a) Quantity relative = 756 / 540 = 1.4

(b) Price relative = 1 – 12.5% = 0.875

(c) (i) 2006 2007 2008

100 87.5 90

(ii) Index for 2008 = 87.5 x 90 / 100 = 78.75

2006 2007 2008

100 87.5 78.75

(d) Receipts in 2008 = 1.4 x 0.9 = 1.26 times receipts in 2007

Percentage increase = (1.26 – 1) x 100% = 26%

3003/3/09/MA Page 16 of 16
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