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

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Page 1 of 17
Advanced Business Calculations Level 3
Series 3 2008
QUESTION 1

Chu has a number of investments. Each one is for a whole number of years. Each one earns
compound interest. He makes a table of his investments as follows, rounding figures to the nearest £.

Investment A Investment B Investment C Investment D

Sum invested £150,000 £110,000 ? ?
Rate of interest
3% 3.5% 4.5% 4%
per annum
Time invested (years) 5 6 ? 6
Final amount
£173,891 ? £105,925 £54,725
(Principle + Interest)
Interest earned £23,891 ? £20,925 ?

Copy the table into your answer book and complete the table.
(Total 13 marks)

Page 2 of 17
MODEL ANSWER TO QUESTION 1

Investment A Investment B Investment C Investment D

Sum invested £150,000 £110,000 £85,000 £43,250
Rate of interest
3% 3.5% 4.5% 4%
per annum
Time invested (years) 5 6 5 6
Final amount
£173,891 £135,218 £105,925 £54,725
(Principle + Interest)
Interest earned £23,891 £25,218 £20,925 £11,475

Investment B

Amount = £110,000 x 1.0356 = £135,218

Interest earned = £135,218 - £110,000 = £25,218

Investment C

Sum invested = £105,925 - £20,925 = £85,000

Time invested (n years), given by: £85,000 x 1.045n = £105,925

n = 1, amount = £85,000 x 1.0451 = £88,825

n = 2, amount = £85,000 x 1.0452 = £92,822

n = 3, amount = £85,000 x 1.0453 = £96,999

n = 4, amount = £85,000 x 1.0454 = £101,364

n = 5, amount = £85,000 x 1.0455 = £105,925 so n = 5

Investment D

£54,725 = Sum invested x 1.046 = Sum invested x 1.26532

Sum invested = £54,725 / 1.26532 = £43,250

Interest earned = £54,725 - £43,250 = £11,475

Page 3 of 17
QUESTION 2

An investor bought 15,000 Ordinary Shares (nominal value £4.50) at 480 pence each. She paid a
broker’s commission of 0.25% of the nominal value.

(a) Calculate the total cost of the shares including commission. Give your answer in pounds.
(3 marks)

After 5 years, the shares are sold for 912 pence.

(b) Calculate the income from the sale, before commission. (2 marks)

For the sale, the investor pays a flat-rate broker’s commission of £80.
No dividend was paid for the first two years.
For the next two years, the dividends declared were:

Year 3 Year 4
3p per share 6.5p per share

For the fifth year the dividend amounted to 2% of the nominal value of the shares.

(c) Calculate the total profit made by the investor, including purchase, sale, dividends and
commissions. (5 marks)

(d) Express the total profit per annum as a percentage of the total cost of the shares. (2 marks)

(Total 12 marks)

Page 4 of 17
MODEL ANSWER TO QUESTION 2

(a) Commission = 0.25% x 15,000 x £4.50 = £168.75

Cost of shares including commission = (15,000 x £4.80) + £168.75 = £72,168.75

(b) Income = 15,000 x £9.12 = £136,800

(c) Dividend = {(3 + 6.5)p x 15,000} + {2% x 15,000 x £4.50} = £1,425 + £1,350 = £2,775

Total profit = £136,800 + £2,775 - £72,168.75 - £80 = £67,326.25

(d) Total profit percent per annum = 100% x £67,326.25 = 18.66%

5 x £72,168.75

Page 5 of 17
QUESTION 3

Four companies calculate their fixed costs per period of production, and their variable costs per unit of
product during the period. Each company sets a selling price and calculates the number of units of
product that must be manufactured and sold in order to break even.

They tabulate their results, as follows:

Company A Company B Company C Company D

Fixed costs per period 1,200,000 1,170,000 ? 2,960,000
Variable costs per unit of product 720 210 925 ?
Selling price 780 249 1,099 349
Number of units for break even 20,000 ? 22,250 80,000

Company A has fixed costs per period of £1,200,000, variable costs per unit of £720, and sets a
selling price of £780. They calculate the number of units for break even as 20,000 units.

Calculate:

(a) The profit made by company A on production and sales of 28,000 units per period. (3 marks)

(b) The number of units for break even for company B. (3 marks)

(c) The fixed costs per period of company C. (3 marks)

(d) The variable costs per unit of product of company D. (3 marks)

(Total 12 marks)

Page 6 of 17
MODEL ANSWER TO QUESTION 3

(a) Contribution per unit = £780 - £720 = £60

Profit on sales of 28,000 units = (28,000 - 20,000) x £60 = £480,000

(b) Contribution per unit = £249 - £210 = £39

Break even point = £1,170,000 / £39 = 30,000 units

(c) Contribution per unit = £1,099 - £925 = £174

Fixed costs per period = £174 x 22,250 = £3,871,500

(d) Contribution = £2,960,000 / £80,000 = £37

Variable costs per unit = £349 - £37 = £312

Page 7 of 17
QUESTION 4

The following information relates to a retailer’s business for one year:

£
Annual sales 463,000
Annual purchases 329,600
Sales returns 11,200
Purchases returns 12,050
Stock at start of year 20,901
Stock at end of year 21,631
Average money owed by debtors 23,750
Average money owed to creditors 15,399
Postage, telephone, internet 4,033
Heating, lighting, 12,101
Rent 42,600

(a) Calculate the ratios for:

(i) overhead expenses to net sales (4 marks)

(ii) average credit taken by the retailer, in days (3 marks)

(iii) average credit given by the retailer, in days. (2 marks)

(b) Give a brief interpretation of the average credit given by the retailer to his debtors. (2 marks)

(c) Calculate the average number of days for which stock is held. (4 marks)

(Total 15 marks)

Page 8 of 17
MODEL ANSWER TO QUESTION 4

(a) (i) Overheads = £4,033 + £12,101 + £42600 = £58,734

Net sales = £463,000 - £11,200 = £451,800

Ratio for overhead expenses = overheads x 100% = £58,734 x 100%

net sales £451,800

= 13%

(ii) Net purchases = £329,600 - £12,050 = £317,550

Average credit taken = average creditors x 365 = £15,399 x 365

net purchases £317,550

= 17.7 days = 18 days

(iii) Average credit given = average debtors x 365 = £23,750 x 365

net sales £451,800

= 19.2 days = 19 days

(b) Average credit given is the average length of time it takes for the retailer’s debtors to pay the
retailer, and is approximately 19 days.

(c) Cost of goods sold (COGS) = stock at start + net purchases - stock at end

= £20,901 + £317,550 - £21,631 = £316,820

Average stock at cost price = ½ (stock at start + stock at end)

= ½ (£20,901 + £21,631) = £21,266

Average time in stock = average stock = £21,266 x 365 days = 24.5 days
COGS £316,820

Page 9 of 17
QUESTION 5

A business owner has a choice of 2 investment projects. The estimated costs and returns are as
follows:

Project P Project Q
£ £
Cost 720,000 980,000

Year 1 cash inflow 120,000 (95,000)

Year 2 cash inflow 250,000 400,000
Year 3 cash inflow 500,000 800,000
Year 4 cash inflow 250,000 400,000

(a) For Project P calculate the payback period. (3 marks)

The project chosen must earn a return of at least 15%.

(b) Using a discount factor of 15%, and the following table, calculate the net present value for
Project Q.

Discounting factor 15%

Year 1 0.870
Year 2 0.756
Year 3 0.658
Year 4 0.572
(5 marks)

Using the same discount factor, the net present value for Project P is £45,400 (positive). The payback
period for Project Q is approximately 2 years 10 months.

(c) Advise the business owner. Refer to your answers to both (a) and (b). (3 marks)

(Total 11 marks)

Page 10 of 17
MODEL ANSWER TO QUESTION 5

(a) Cost outstanding after 2 years = £720,000 - £120,000 - £250,000 = £350,000

As a proportion of year 3 inflow = £350,000 / £500,000

Payback period = 2.7 years = 2 years 8.4 months

(b) Cash flow Discount Present

£ factor Value £
Cost (980,000) (980,000)

Year 1 cash inflow (95,000) 0.870 (82,650)

Year 2 cash inflow 400,000 0.756 302,400
Year 3 cash inflow 800,000 0.658 526,400
Year 4 cash inflow 400,000 0.572 228,800
(5,050)

(c) Project Q has a negative net present value at a discount rate of 15%, and is not acceptable.
Project P has the shorter payback period and a positive net present value at this rate.
Project P is therefore recommended to proceed.

Page 11 of 17
QUESTION 6

(a) The following information relates to the bankruptcy of Company P:

Total assets available for creditors £52,184

Total owed to secured creditors £11,110
Total liabilities £85,790

Calculate:

(i) How much is owed to unsecured creditors (2 marks)

(ii) The assets available for unsecured creditors (2 marks)

(iii) The rate in the pound paid to unsecured creditors. (2 marks)

(b) The following information relates to the bankruptcy of Company Q:

Total liabilities £64,950

Assets available for unsecured creditors £23,310
Rate in the pound paid to unsecured creditors 60p

Calculate:

(i) How much is owed to unsecured creditors (2 marks)

(ii) How much is owed to secured creditors (2 marks)

(iii) The total assets available for creditors. (2 marks)

(Total 12 marks)

Page 12 of 17
MODEL ANSWER TO QUESTION 6

(a) (i) Owed to unsecured creditors = £85,790 - £11,110 = £74,680

(ii) Assets available for unsecured creditors = £52,184 - £11,110 = £41,074

(iii) Rate in the £ paid to unsecured creditors = £1 x £41,074 / £74,680 = 55p

(b) (i) Owed to unsecured creditors = £23,310 / 0.6 = £38,850

(ii) Owed to secured creditors = £64,950 - £38,850 = £26,100

(iii) Total assets available for creditors = £23,310 + £26,100 = £49,410

Page 13 of 17
QUESTION 7

A factory owner buys two machines. Machine A costs £1,060,000 and is estimated to have a life of 4
years and a scrap value of £20,000.

Using the equal instalment method:

(a) Calculate the percentage of the cost to be written off each year. Give your answer correct to 3
significant figures.
(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)

Machine B is depreciated by the equal instalment method over 6 years. It has the same scrap value
as machine A. It also has the same book value at the end of year one as machine A.

(c) Calculate the original cost of machine B. (5 marks)

(Total 14 marks)

Page 14 of 17
MODEL ANSWER TO QUESTION 7

(a) Total depreciation over five years = 1,060,000 – 20,000 = 1,040,000

% of cost to be written off each year

= 1,040,000 x 100% = 24.5%
1,060,000 x 4

(b) Annual depreciation = 1,040,000 ÷ 4 = £260,000

Depreciation schedule (£)

Annual Accumulated Book

End of year Depreciation Depreciation Value

0 0 0 1,060,000
1 260,000 260,000 800,000
2 260,000 520,000 540,000
3 260,000 780,000 280,000
4 260,000 1,040,000 20,000

(c) Depreciation of Machine B from end year 1 to end year 6 = 800,000 – 20,000 = £780,000

Number of years from end year 1 to end year 6 = 5

Depreciation of Machine B per year = 780,000 / 5 = £156,000

Original cost of Machine B = 800,000 + 156,000 = £956,000

Page 15 of 17
QUESTION 8

Company X sells Product A with the following prices and sales:

Year 2004 2005 2006

Price (£) 12.50 11.25 10.50
Sales 240,000 276,000 345,000

(a) Calculate the price relative for Product A for year 2006 with year 2005 as the base year.
(2 marks)

(b) Calculate the index of prices for Product A for the years 2004 to 2006 with year 2004 as the base
year.
(3 marks)

(c) Calculate a chain base index for the sales of Product A for the figures shown. (3 marks)

The quantity relative for Product A for year 2007 with year 2006 as the base year was 1.08, while the
price decreased by £0.51 from year 2006 to year 2007.

(d) Calculate the increase in total income from the sales of Product A in year 2007 as a percentage
of the total income from sales of Product A in year 2006. Give your answer correct to 3
significant figures. (3 marks)

(Total 11 marks)

Page 16 of 17
MODEL ANSWER TO QUESTION 8

(a) Price relative for year 2006 with year 2005 as base = 10.50/11.25 = 0.93

(b) Index for year 2005 with year 2004 as base = 100 x 11.25 / 12.5 = 90

Index for year 2006 with year 2004 as base = 100 x 10.50 / 12.5 = 84

Index of prices: Year 2004 2005 2006

Index 100 90 84

(c) Index for year 2005 with year 2004 as base = 100 x 276,000 / 240,000 = 115

Index for year 2006 with year 2005 as base = 100 x 345,000 / 276,000 = 125

Index of sales: Year 2004 2005 2006

Index 100 115 125

(d) Relative income = 1.08 x (10.50 – 0.51) / 10.50 = 1.0275

Percentage increase = 100% x (1.0275 – 1) = 2.75%

Page 17 of 17