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Business
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Level 3

Model Answers
Series 2 2008 (Code 3003)
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Advanced Business Calculations Level 3
Series 2 2008

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International Qualifications. The contents of this booklet are divided into 3 elements:

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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

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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

(a) Annual rate of interest = 0.00753% x 365 = 2.748%

(b) To 3 significant figures = 2.75%

(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.

(d) Amount = Principle x (1 + percentage rate)Number of years

£60,000 = Principle x 1.03754

Principle = £60,000 / 1.03754 = £51,784.386

Amount to be invested = £51,784.39

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 held the stock for 4 years.

(b) Calculate the interest received over this period. (2 marks)

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

(c) Calculate the cost of £100 of the debenture stock. (2 marks)

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

(a) Nominal value of stock = 100 x 193,800/102 = £190,000

(b) Interest received = 190,000 x 4 x 3¼% = £24,700

(c) Cost of £100 of debenture stock = 100 x 193,800/204,000 = £95

(d) Number of units = 193,800/200 = 969 units

(e) Increase in value of units = 969 x (225 – 200) = £24,225

Bank would have received less: 24,700 – 24,225 = £475

3003/2/08/MA Page 6 of 18
QUESTION 3

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

Fixed costs £5,400,000


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:

Fixed costs £7,680,000


Variable costs £300 per unit

This product is sold for £357 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

(a) Contribution per unit = £440 - £395 = £45

Break-even = £5,400,000/£45 = 120,000 units per period

(b) Let Q be the quantity produced per period

Total cost for Manufacturer A = 5,400,000 + 395Q

Total cost for Manufacturer B = 7,680,000 + 300Q

For the same total cost: 5,400,000 + 395Q = 7,680,000 + 300Q

Q(395 – 300) = 7,680,000 – 5,400,000

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

(c) Profit, manufacturer A = 200,000 x £45 - £5,400,000 = £3,600,000

Profit, manufacturer B = 200,000 x (£357 - £300) - £7,680,000 = £3,720,000

Manufacturer B has the greater profit, by £120,000

(d) Equal profit when: 45Q - 5,400,000 = 57Q - 7,680,000

Q(57 – 45) = 7,680,000 – 5,400,000

Level of production and sales = 2,280,000/12 = 190,000 units

3003/2/08/MA Page 8 of 18
QUESTION 4

The following information relates to a retailer’s business for a trading year.

£
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:

(i) the cost of goods sold (3 marks)

(ii) the gross profit. (2 marks)

(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:

(i) the overhead expenses (2 marks)

(ii) the net profit as a percentage of net sales. (3 marks)

(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

COGS = Net purchases + opening stock – closing stock

= 291,200 + 17,200 – 16,400 = £292,000

(ii) Net sales = Sales – sales returns = 505,000 – 15,000 = £490,000

Gross profit = Net sales – COGS = 490,000 – 292,000 = £198,000

(b) Average stock = ½(17,200 + 16,400) = £16,800

Average number of days in stock = 365 x Average stock/COGS

= 365 x 16,800/292,000 = 21 days

(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

Net profit percent = 100% x 104,900/490,000 = 21.4%

(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

An investor estimates the following figures for investment project P:

Initial cost of project £5,500,000


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 Discount factor (12%)


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

(a) Return per annum = 7,000,000/5 = £1,400,000

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

Average rate of return = 100% x 1,155,000/5,500,000 = 21%

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

= -£245,000

(ii) Contribution required in year 4 = 73,000 – (-245,000) = £318,000

Estimated net cash inflow = 318,000/0.636 = £500,000

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.

Calculate the assets available for creditors. (4 marks)

(Total 14 marks)

3003/2/08/MA Page 13 of 18
MODEL ANSWER TO QUESTION 6

(a) (i) Rate in the £ = £1 x 3,443.50/25,500 = £0.135

Amount received = 0.135 x 12,000 = £1,620

(ii) Owed to unsecured creditors = 140,700 – 88,700 = £52,000

Available for unsecured creditors = 111,060 – 88,700 = £22,360

Rate in the £ = £1 x 22,360/52,000 = £0.43

Amount received = 0.43 x 12,000 = £5,160

(c) Rate in the £ = £1 x 5,550/37,000 = £0.15

Paid to unsecured creditors = 0.15 x 99,400 = £14,910

Total assets available = total amount paid = 14,910 + 8,540 = £23,450

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.

Using the equal instalment method

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

(b) Prepare a depreciation schedule that shows:

(i) the annual depreciation for each year

(ii) the accumulated depreciation for each year

(iii) the book value at the end of each year.


(6 marks)

Using the diminishing balance method:

(c) Calculate the annual rate of depreciation. (4 marks)

(Total 13 marks)

3003/2/08/MA Page 15 of 18
MODEL ANSWER TO QUESTION 7

(a) Total depreciation over five years = 200,000 – 5,000 = 195,000

% of cost to be written off in five years

= 195,000 x 100% = 97.5%


200,000

(b) Annual depreciation = 195,000 ÷ 5 = £39,000

Depreciation schedule (£)

Annual Accumulated Book


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

(c) Annual rate of depreciation (diminishing balance)

T
d=1- A/ P
5,000 ÷ 200,000 = 0.025

5
0.025 = 0.4782

d = 1 - 0.4782

d = 0.5218 (or 52%)

3003/2/08/MA Page 16 of 18
QUESTION 8

Company X sells Product P with the following prices:

Year 2004 2005 2006 2007


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.

(b) Calculate the selling price of Product P in year 2003. (2 marks)

In 2007, company X sells a second product, Product Q, at a price of £26.10.

(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

(a) 2004: Chain base index = 100 x 31.20/26.00 = 120

2005: Chain base index = 100 x 35.10/31.20 = 112.5

2006: Chain base index = 100 x 38.61/35.10 = 110

(b) Selling price in year 2003 = £26.00 ÷ 1.30 = £20


(c) Total weighting = 200 + 250 = 450

Weight times price for product P = 38.61 x 200 = £7,722

Weight times price for product Q = 26.10 x 250 = £6,525

Sum of weighted prices = 7,722 + 6,525 = £14,247

Weighted mean = £14,247 ÷ 450 = £31.66

3003/2/08/MA Page 18 of 18 © Education Development International plc 2008