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Business

Calculations

Level 3

Model Answers

Series 2 2008 (Code 3003)

Vision Statement

Our vision is to contribute to the achievements of learners around

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adapted to meet both local market and wider occupational needs

and delivered to international standards.

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Advanced Business Calculations Level 3

Series 2 2008

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:

(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)

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.

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 2 of 18

Advanced Business Calculations Level 3

Series 2 2008

QUESTION 1

In 2007, Barbara uses the products method to check her bank balance. She calculates that she is

receiving interest at the rate of approximately 0.00753% per day.

(a) Basing your calculation on simple interest and giving your answer correct to four significant

figures, calculate the annual rate of rate of interest paid to Barbara.

(2 marks)

(b) State your answer in (a) rounded to three significant figures. (1 mark)

(c) Giving reasons, state which of the two answers is likely to be more accurate. (2 marks)

Barbara wishes to replace computer equipment in 4 years time when the cost is estimated to be

£60,000. The assumed rate of interest is 3¾% compounded annually.

(d) Giving your answer correct to the nearest £, state the minimum sum that must be invested to

ensure that at least £60,000 is available in 4 years time.

(5 marks)

(Total 10 marks)

3003/2/08/MA Page 3 of 18

MODEL ANSWER TO QUESTION 1

(c) The figure of 0.00753% per day is known to be approximate, so the four-figure answer in (a) is

not reliable to four figures. The figure in (b) of 2¾% is a reasonable figure for a bank to use, and

is likely to be the more accurate.

3003/2/08/MA Page 4 of 18

QUESTION 2

£100 of 3¼% government stock can be bought for £102. A bank invested £193,800 in the stock.

(a) Calculate the nominal value of the stock bought by the bank. (2 marks)

The bank could have purchased £204,000 of debenture stock for the £193,800.

The bank could have invested the £193,800 instead in a unit trust with an offer price of £200 per unit,

and sold it after 4 years at £225 per unit.

(d) Calculate the number of units that could have been purchased. (2 marks)

(e) Compare the increase in value of the units with the interest on the government stock and

calculate how much more or less the bank would have received if it had invested in the unit trusts

instead of government stock.

(4 marks)

(Total 12 marks)

3003/2/08/MA Page 5 of 18

MODEL ANSWER TO QUESTION 2

3003/2/08/MA Page 6 of 18

QUESTION 3

Manufacturer A sells a particular product for £440. Production costs are as follows:

Variable costs £395 per unit

(a) Calculate the number of units to be produced and sold for break-even. (3 marks)

Manufacturer B sells a similar product. By investing in newer machinery, production costs are as

follows:

Variable costs £300 per unit

(b) Calculate the level of production for which the two methods have the same total costs. (3 marks)

(c) Compare the profits of the two manufacturers for production and sales of 200,000 units. (5 marks)

(d) Calculate the level of production and sales for which the two methods produce the same profit or

loss.

(3 marks)

(Total 14 marks)

3003/2/08/MA Page 7 of 18

MODEL ANSWER TO QUESTION 3

Output per period for the same total production costs = 2,280,000/95 = 24,000 units

3003/2/08/MA Page 8 of 18

QUESTION 4

£

Sales 505,000

Purchases 316,250

Sales returns 15,000

Purchases returns 25,050

Initial stock value 17,200

Final stock value 16,400

(a) Calculate:

(b) Calculate the average number of days the stock is held. (3 marks)

The overhead expenses for the business in the trading year were 19% of net sales.

(c) Calculate:

(d) Give a brief explanation of the difference between gross and net profit. (2 marks)

(Total 15 marks)

3003/2/08/MA Page 9 of 18

MODEL ANSWER TO QUESTION 4

(a) (i) Net purchases = Purchases – purchase returns = 316,250 – 25,050 = 291,200

(c) (i) Overhead expenses = 19% x Net sales = 0.19 x 490,000 = £93,100

(ii) Net profit = Gross profit – Overhead expenses = 198,000 – 93,100 = £104,900

(d) Gross profit is calculated before taking account of overhead expenses. Net profit takes account

of overhead expenses and is therefore gross profit minus overhead expenses.

3003/2/08/MA Page 10 of 18

QUESTION 5

Expected life of project 5 years

Total return before allowing for repairs and maintenance £7,000,000

Average cost per annum of repairs and maintenance £245,000

(a) Estimate the average rate of return (accounting gross rate of return) of project P.

(4 marks)

The investor estimates the costs and returns for investment project Q as follows:

£

Initial cost 6,250,000

Year 1 net cash inflow 2,500,000

Year 2 net cash inflow 2,500,000

Year 3 net cash inflow 2,500,000

(b) Using a discount rate of 12%, and the following table, calculate the net present value for Project

Q.

Year 1 0.893

Year 2 0.797

Year 3 0.712

(4 marks)

The investor believes that Project Q can provide cash inflow also in year 4. She now estimates that

the NPV will be positive with a value of £73,000. The discount factor for year 4 is 0.636.

(c) Calculate the estimated net cash inflow for Project Q for year 4. (3 marks)

(Total 11 marks)

3003/2/08/MA Page 11 of 18

MODEL ANSWER TO QUESTION 5

Return per annum net of repairs and maintenance = 1,400,000 – 245,000 = £1,155,000

(b) (i) Net present value = 2,500,000 x (0.893 + 0.797 + 0.712) – 6,250,000

= -£245,000

3003/2/08/MA Page 12 of 18

QUESTION 6

(a) In each of the following two bankruptcies calculate the rate in the pound paid to unsecured

creditors and the amount received by an unsecured creditor who is owed £12,000.

(i) Bankruptcy A: An unsecured creditor who is owed £25,500 is paid £3,443.50 (4 marks)

(ii) Bankruptcy B: The total liabilities are £140,700, of which £88,700 is owed to secured

creditors. The total assets available for creditors are £111,060. (6 marks)

(b) In another bankruptcy, Bankruptcy C, an unsecured creditor who was owed £37,000 received

£5,550. The company owed a total of £99,400 to unsecured creditors and £8,540 to secured

creditors.

(Total 14 marks)

3003/2/08/MA Page 13 of 18

MODEL ANSWER TO QUESTION 6

3003/2/08/MA Page 14 of 18

QUESTION 7

A factory machine that costs £200,000 is estimated to have a life of 5 years and a scrap value of

£5,000.

(a) Calculate the percentage of the cost that must be written off in total. (3 marks)

(6 marks)

(Total 13 marks)

3003/2/08/MA Page 15 of 18

MODEL ANSWER TO QUESTION 7

200,000

End of year Depreciation Depreciation Value

0 0 0 200,000

1 39,000 39,000 161,000

2 39,000 78,000 122,000

3 39,000 117,000 83,000

4 39,000 156,000 44,000

5 39,000 195,000 5,000

T

d=1- A/ P

5,000 ÷ 200,000 = 0.025

5

0.025 = 0.4782

d = 1 - 0.4782

3003/2/08/MA Page 16 of 18

QUESTION 8

Price (£) 26.00 31.20 35.10 38.61

(a) Calculate the prices of Product P for years 2005 to 2007 as a chain base index. (4 marks)

The price relative for Product P for year 2004 with 2003 as the base year is 1.30.

(c) Using a weighting of 200 for Product P and 250 for Product Q, calculate the weighted average for

prices for Product P and Product Q combined in 2007.

(5 marks)

(Total 11 marks)

3003/2/08/MA Page 17 of 18

MODEL ANSWER TO QUESTION 8

(c) Total weighting = 200 + 250 = 450

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