An original Thinka practice paper modelled on the structure and difficulty of the Nov 2023 (V3) Cambridge International A Level Accounting (9706) paper. Not affiliated with or reproduced from Cambridge.
Section A: Paper 13
Answer all 30 multiple choice questions by selecting A, B, C, or D.
30 PastPaper.question · 30 PastPaper.marks
PastPaper.question 1 · Multiple Choice
1 PastPaper.marks
A company’s equity balances at 1 January 2023 were as follows:
During the year ended 31 December 2023, the following events occurred:
1. Profit for the year was \( \$85,000 \). 2. An interim ordinary dividend of \( \$15,000 \) was paid. 3. A final ordinary dividend of \( \$25,000 \) was proposed by the directors. 4. \( \$20,000 \) was transferred to the general reserve. 5. A bonus issue of \( 10,000 \) ordinary shares was made, fully funded from the share premium account.
What was the balance of retained earnings at 31 December 2023?
A.\( \$135,000 \)
B.\( \$145,000 \)
C.\( \$170,000 \)
D.\( \$190,000 \)
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
To calculate the closing balance of retained earnings at 31 December 2023:
Opening balance: \( \$120,000 \) Add: Profit for the year: \( + \$85,000 \) Less: Interim ordinary dividend paid: \( - \$15,000 \) Less: Transfer to general reserve: \( - \$20,000 \)
Note 1: Proposed dividends (\( \$25,000 \)) are not recognized as a liability or deducted from retained earnings under IAS 10 until approved. Thus, they are excluded from this calculation. Note 2: The bonus issue was fully funded from the share premium account, so it does not affect retained earnings.
1 mark for the correct option (C). Method: Deduct paid interim dividends and transfers to reserves from the sum of opening retained earnings and profit. Proposed dividends and the bonus issue funded from share premium must be ignored.
PastPaper.question 2 · Multiple Choice
1 PastPaper.marks
A company has ordinary share capital of \( \$200,000 \), consisting of shares with a nominal value of \( \$0.50 \) each. The balance on the share premium account is \( \$50,000 \).
The company made a rights issue of \( 1 \) new ordinary share for every \( 4 \) shares already held, at a price of \( \$0.80 \) per share. This rights issue was fully taken up.
Immediately after the rights issue, the company made a bonus issue of \( 1 \) new share for every \( 10 \) shares held, utilising the share premium account as far as possible.
What was the balance on the share premium account after these transactions?
A.\( \$40,000 \)
B.\( \$55,000 \)
C.\( \$80,000 \)
D.\( \$95,000 \)
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
Step 1: Calculate the number of shares before the rights issue: \( \text{Number of shares} = \frac{\$200,000}{\$0.50} = 400,000 \text{ shares} \).
Step 2: Calculate the rights issue details: \( \text{Rights shares issued} = 400,000 \times \frac{1}{4} = 100,000 \text{ shares} \). Premium per share = \( \$0.80 - \$0.50 = \$0.30 \). \( \text{Total premium from rights issue} = 100,000 \times \$0.30 = \$30,000 \). Share premium account balance after rights issue = \( \$50,000 + \$30,000 = \$80,000 \).
Step 3: Calculate the bonus issue details: \( \text{Total shares before bonus issue} = 400,000 + 100,000 = 500,000 \text{ shares} \). \( \text{Bonus shares issued} = 500,000 \times \frac{1}{10} = 50,000 \text{ shares} \). Bonus shares are issued at par value: \( 50,000 \times \$0.50 = \$25,000 \). This is funded from the share premium account.
1 mark for the correct option (B). Method: Calculate the premium generated from the rights issue, add it to the opening premium, then deduct the par value of the bonus shares issued.
PastPaper.question 3 · Multiple Choice
1 PastPaper.marks
A business manufactures two products, X and Y. The following information is available:
| | Product X | Product Y | | :--- | :---: | :---: | | Selling price per unit | \( \$25 \) | \( \$32 \) | | Variable cost per unit | \( \$15 \) | \( \$20 \) | | Maximum annual demand (units) | 1,000 | 1,200 |
Both products require a specific raw material which is in short supply. This raw material costs \( \$4 \) per kg. The variable cost per unit includes this raw material cost of \( \$8 \) for Product X and \( \$12 \) for Product Y.
Only \( 3,500 \text{ kg} \) of the raw material is available for the next period.
What is the production plan that will maximise the profit of the business?
A.500 units of X and 833 units of Y
B.1,000 units of X and 500 units of Y
C.100 units of X and 1,100 units of Y
D.1,000 units of X and 1,200 units of Y
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
Step 1: Calculate the contribution per unit for each product: * Product X: \( \$25 - \$15 = \$10 \) * Product Y: \( \$32 - \$20 = \$12 \)
Step 2: Calculate raw material required per unit: * Product X: \( \frac{\$8}{\$4\text{/kg}} = 2\text{ kg} \) * Product Y: \( \frac{\$12}{\$4\text{/kg}} = 3\text{ kg} \)
Step 3: Calculate contribution per kg of limiting factor: * Product X: \( \frac{\$10}{2\text{ kg}} = \$5 \text{ per kg} \) * Product Y: \( \frac{\$12}{3\text{ kg}} = \$4 \text{ per kg} \)
Step 4: Allocate material based on ranking (Product X first, then Product Y): * Produce maximum demand of Product X: \( 1,000 \text{ units} \times 2 \text{ kg} = 2,000 \text{ kg} \). * Remaining material = \( 3,500 \text{ kg} - 2,000 \text{ kg} = 1,500 \text{ kg} \). * Produce Product Y with remaining material: \( \frac{1,500 \text{ kg}}{3 \text{ kg/unit}} = 500 \text{ units} \).
Optimal production plan is 1,000 units of X and 500 units of Y.
PastPaper.markingScheme
1 mark for the correct option (B). Method: Determine contribution per kg of the limiting factor, rank the products, and allocate the available resources accordingly.
PastPaper.question 4 · Multiple Choice
1 PastPaper.marks
Which of the following items are recorded in the Statement of Changes in Equity of a limited company?
1. Issue of 8% non-cumulative preference shares 2. Payment of interest on 6% debentures 3. Creation of a general reserve 4. Purchase of non-current assets
A.1 and 2 only
B.1 and 3 only
C.2 and 4 only
D.1, 3 and 4 only
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
1. Issue of 8% non-cumulative preference shares increases equity (Share Capital and possibly Share Premium), so it is recorded in the Statement of Changes in Equity. 2. Payment of interest on 6% debentures is a finance cost and is recorded in the Statement of Profit or Loss. 3. The creation of a general reserve is a transfer from retained earnings to another equity account and is shown in the Statement of Changes in Equity. 4. Purchase of non-current assets affects the Statement of Financial Position and Statement of Cash Flows, not equity directly.
Therefore, only items 1 and 3 are recorded in the Statement of Changes in Equity.
PastPaper.markingScheme
1 mark for the correct option (B). Method: Identify transactions affecting capital and reserves accounts in the Statement of Changes in Equity versus those affecting profit/loss or non-equity balance sheet elements.
PastPaper.question 5 · Multiple Choice
1 PastPaper.marks
A company has a current ratio of 2.0:1 and an acid test ratio of 1.1:1.
It offers a 2% cash discount to a credit customer who pays their outstanding balance of \( \$5,000 \) immediately.
What is the effect of this transaction on the company's current ratio and acid test ratio?
A.Both ratios will increase
B.Both ratios will decrease
C.Current ratio increases; Acid test ratio decreases
D.Current ratio decreases; Acid test ratio increases
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
Let's model the scenario with numbers: Assume Current Liabilities = \( \$100,000 \). Then Current Assets = \( \$200,000 \) (Current Ratio = 2.0:1). Quick Assets = \( \$110,000 \) (Acid Test Ratio = 1.1:1).
When the customer pays \( \$5,000 \) with a 2% discount: * Trade receivables decrease by \( \$5,000 \). * Cash increases by \( \$5,000 \times 0.98 = \$4,900 \). * The net effect is a decrease of \( \$100 \) in total current assets and total quick assets due to the discount allowed (an expense).
New Current Assets = \( \$199,900 \). New Current Ratio = \( \frac{\$199,900}{\$100,000} = 1.999:1 \) (Decrease).
New Quick Assets = \( \$109,900 \). New Acid Test Ratio = \( \frac{\$109,900}{\$100,000} = 1.099:1 \) (Decrease).
Therefore, both ratios will decrease.
PastPaper.markingScheme
1 mark for the correct option (B). Method: Analyze the net change in current assets and quick assets resulting from a discount expense.
PastPaper.question 6 · Multiple Choice
1 PastPaper.marks
The following information is available for a manufacturing company last year:
Next year, the directors plan to reduce the selling price of the product by 5% to increase demand. This is expected to increase sales volume by 10%. The variable cost per unit will remain unchanged, but fixed costs will increase by \( \$15,000 \).
What is the expected profit for next year?
A.\( \$39,000 \)
B.\( \$45,000 \)
C.\( \$54,000 \)
D.\( \$61,000 \)
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
Let's calculate the values for next year:
1. New Revenue: Original Revenue was \( \$400,000 \). With a 5% price reduction and 10% volume increase: \( \text{New Revenue} = \$400,000 \times 0.95 \times 1.10 = \$418,000 \).
2. New Variable Costs: Original Variable Cost was \( \$240,000 \). With a 10% volume increase and unchanged unit variable cost: \( \text{New Variable Costs} = \$240,000 \times 1.10 = \$264,000 \).
1 mark for the correct option (A). Method: Update revenue for price/volume changes, scale variable costs by volume, adjust fixed costs, and find the resulting profit.
PastPaper.question 7 · Multiple Choice
1 PastPaper.marks
A business makes a single product with a contribution-to-sales (C/S) ratio of 40%. The annual fixed costs are \( \$120,000 \). In the current year, the total sales revenue is \( \$400,000 \).
What is the margin of safety expressed as a percentage of sales?
A.25%
B.30%
C.60%
D.75%
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
Step 1: Calculate the break-even point in sales value: \( \text{Break-even sales} = \frac{\text{Fixed Costs}}{\text{C/S Ratio}} = \frac{\$120,000}{0.40} = \$300,000 \).
Step 2: Calculate the margin of safety in sales value: \( \text{Margin of safety} = \text{Current sales} - \text{Break-even sales} = \$400,000 - \$300,000 = \$100,000 \).
Step 3: Calculate the margin of safety as a percentage of sales: \( \text{Margin of safety \%} = \left( \frac{\$100,000}{\$400,000} \right) \times 100 = 25\% \).
PastPaper.markingScheme
1 mark for the correct option (A). Method: Calculate break-even revenue using the C/S ratio, determine the difference from actual sales, and divide by actual sales to find the percentage.
PastPaper.question 8 · Multiple Choice
1 PastPaper.marks
Which of the following is a disadvantage or risk associated with implementing a computerised accounting system compared to a manual system?
A.Difficulty in generating real-time trial balances
B.Increased risk of data loss due to system crashes if backup procedures are not maintained
C.Higher requirement for manual cross-casting of books of prime entry
D.Reduced speed in processing high-volume daily transactions
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
Option B is correct. Computerised systems run a constant risk of data corruption, hardware failures, malware attacks, or data loss if robust backup procedures are not implemented. Options A, C, and D are incorrect because computerised systems excel at generating instant reports (such as trial balances), require no manual cross-casting, and process high-volume transactions at much faster speeds than manual systems.
PastPaper.markingScheme
1 mark for selecting B. Option highlights a primary control risk of digital systems compared to paper-based manual ledgers.
PastPaper.question 9 · multiple_choice
1 PastPaper.marks
A company had a retained earnings balance of \(\$120,000\) on 1 January 2023. For the year ended 31 December 2023, the profit for the year was \(\$75,000\). During the year, the company paid an interim ordinary dividend of \(\$12,000\) and the final ordinary dividend for 2022 of \(\$18,000\). On 31 December 2023, the directors proposed a final ordinary dividend for 2023 of \(\$22,000\) and transferred \(\$15,000\) to the general reserve. What was the retained earnings balance on 31 December 2023?
A.\(\$150,000\)
B.\(\$128,000\)
C.\(\$165,000\)
D.\(\$168,000\)
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
According to financial reporting standards (IAS 10), proposed dividends are non-adjusting events and are not recognised as a liability or reduction of equity at the year-end because they have not been approved. Therefore, the proposed dividend of \(\$22,000\) is ignored in this calculation. Retained earnings balance is calculated as: Opening balance (\(\$120,000\)) + Profit for the year (\(\$75,000\)) - Interim dividend paid (\(\$12,000\)) - Prior year final dividend paid (\(\$18,000\)) - Transfer to general reserve (\(\$15,000\)) = \(\$150,000\).
PastPaper.markingScheme
1 mark for the correct answer: \(\$150,000\). Award 0 marks for distractors which incorrectly include the proposed dividend or fail to adjust for reserves.
PastPaper.question 10 · multiple_choice
1 PastPaper.marks
A business manufactures two products, X and Y. The following information is available: Product X has a selling price of \(\$50\) and variable costs of \(\$30\) per unit. Product Y has a selling price of \(\$65\) and variable costs of \(\$40\) per unit. Both products use Material Z, which costs \(\$5\) per kg. Product X requires 2 kg of Material Z per unit, while Product Y requires 5 kg of Material Z per unit. If Material Z is in short supply, which product should the company prioritise to maximise profit, and what is its contribution per kg of the limiting factor?
A.Product X, with a contribution of \(\$10\) per kg
B.Product Y, with a contribution of \(\$5\) per kg
C.Product X, with a contribution of \(\$20\) per unit
D.Product Y, with a contribution of \(\$25\) per unit
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
To find the optimal production priority, we calculate the contribution per kg of Material Z. For Product X: Contribution per unit = \(\$50 - \$30 = \$20\). Contribution per kg of Material Z = \(\$20 / 2\text{ kg} = \$10\text{ per kg}\). For Product Y: Contribution per unit = \(\$65 - \$40 = \$25\). Contribution per kg of Material Z = \(\$25 / 5\text{ kg} = \$5\text{ per kg}\). Product X should be prioritised as it provides a higher contribution of \(\$10\) per kg of limiting factor.
PastPaper.markingScheme
1 mark for identifying Product X as the priority with \(\$10\) contribution per kg of limiting factor.
PastPaper.question 11 · multiple_choice
1 PastPaper.marks
A company has current assets of \(\$180,000\) (including inventory valued at \(\$60,000\)) and current liabilities of \(\$80,000\). The company then sold inventory costing \(\$20,000\) for \(\$28,000\) on credit. What is the new liquid (acid test) ratio?
A.1.85 : 1
B.1.50 : 1
C.1.60 : 1
D.2.35 : 1
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
Initially, liquid assets (excluding inventory) = Current Assets - Inventory = \(\$180,000 - \$60,000 = \$120,000\). Current liabilities = \(\$80,000\). When inventory is sold on credit, trade receivables (liquid assets) increase by the selling price of \(\$28,000\). Inventory (which is already excluded from liquid assets) decreases. New liquid assets = \(\$120,000 + \$28,000 = \$148,000\). New liquid ratio = \(\$148,000 / \$80,000 = 1.85:1\).
PastPaper.markingScheme
1 mark for the correct calculation of \(1.85:1\). Award 0 marks if the candidate did not include the receivable or incorrectly included inventory.
PastPaper.question 12 · multiple_choice
1 PastPaper.marks
A company has fixed costs of \(\$120,000\). It sells a single product for \(\$30\) per unit, which incurs a variable cost of \(\$18\) per unit. If actual sales are 16,000 units, what is the margin of safety percentage?
A.37.5%
B.60.0%
C.62.5%
D.50.0%
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
1. Contribution per unit = \(\$30 - \$18 = \$12\). 2. Break-even point (units) = \(\$120,000 / \$12 = 10,000\) units. 3. Margin of safety (units) = \(16,000\text{ (actual)} - 10,000\text{ (break-even)} = 6,000\) units. 4. Margin of safety percentage = \((6,000 / 16,000) \times 100 = 37.5\%\).
PastPaper.markingScheme
1 mark for the correct answer: 37.5%. 0 marks for incorrect percentages based on wrong formula or math.
PastPaper.question 13 · multiple_choice
1 PastPaper.marks
On 1 January 2021, an asset was purchased for \(\$80,000\). Depreciation was charged annually at 20% using the straight-line method. On 1 January 2023, the business decided to change the method of depreciation to the reducing balance method at 30% per annum. What is the depreciation charge for the year ended 31 December 2023?
A.\(\$14,400\)
B.\(\$16,000\)
C.\(\$24,000\)
D.\(\$9,600\)
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
Straight line depreciation charged for 2021 and 2022: \(\$80,000 \times 20\% = \$16,000\) per year. Total accumulated depreciation on 1 January 2023 = \(\$16,000 \times 2 = \$32,000\). Carrying value on 1 January 2023 = \(\$80,000 - \$32,000 = \$48,000\). Under reducing balance method for 2023, depreciation is charged on the carrying value: \(\$48,000 \times 30\% = \$14,400\).
PastPaper.markingScheme
1 mark for the correct answer of \(\$14,400\). 0 marks for straight-line or unadjusted calculations.
PastPaper.question 14 · multiple_choice
1 PastPaper.marks
A and B are in partnership, sharing profits and losses in the ratio 3:2. On 1 January, their capital accounts were: A: \(\$60,000\); B: \(\$40,000\). On this date, C is admitted as a partner. The new profit-sharing ratio is 2:2:1. Goodwill is valued at \(\$50,000\) but is not to be retained in the books of account. C introduces \(\$30,000\) cash as capital. What are the capital account balances of A and B immediately after the admission of C?
A.A: \(\$70,000\); B: \(\$40,000\)
B.A: \(\$90,000\); B: \(\$60,000\)
C.A: \(\$80,000\); B: \(\$50,000\)
D.A: \(\$60,000\); B: \(\$40,000\)
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
1. Credit Goodwill to A and B in old ratio (3:2): A: \(\$50,000 \times 3/5 = +\$30,000\); B: \(\$50,000 \times 2/5 = +\$20,000\). 2. Write off Goodwill to all partners in new ratio (2:2:1, total 5 shares): A: \(\$50,000 \times 2/5 = -\$20,000\); B: \(\$50,000 \times 2/5 = -\$20,000\); C: \(\$50,000 \times 1/5 = -\$10,000\). 3. Adjust balances: Partner A: \(\$60,000 + \$30,000 - \$20,000 = \$70,000\). Partner B: \(\$40,000 + \$20,000 - \$20,000 = \$40,000\).
PastPaper.markingScheme
1 mark for A: \(\$70,000\), B: \(\$40,000\). Other options either fail to write off or fail to use the correct ratios.
PastPaper.question 15 · multiple_choice
1 PastPaper.marks
A company's cash book showed a debit balance of \(\$8,400\) before bank reconciliation. The following differences were discovered: Bank charges of \(\$150\) shown on the bank statement were not in the cash book. A customer's cheque for \(\$1,200\) was returned by the bank as unpaid, but no entry was made in the cash book. Unpresented cheques totaled \(\$1,850\) and uncredited deposits totaled \(\$2,400\). What was the balance showing on the bank statement?
A.\(\$6,500\) credit
B.\(\$6,500\) debit
C.\(\$7,600\) credit
D.\(\$7,050\) credit
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
1. Adjust the cash book: Adjusted cash book balance = \(\$8,400\text{ (debit)} - \$150\text{ (bank charges)} - \$1,200\text{ (dishonoured cheque)} = \$7,050\text{ (debit)}\). 2. Reconcile with the bank statement balance (\(X\)): \(X + \$2,400\text{ (uncredited deposits)} - \$1,850\text{ (unpresented cheques)} = \$7,050\). \(X + \$550 = \$7,050 \implies X = \$6,500\). Since the adjusted cash book has a debit (positive) balance, the corresponding bank statement has a credit (positive) balance of \(\$6,500\).
PastPaper.markingScheme
1 mark for the correct answer of \(\$6,500\) credit. 0 marks for debit options or incorrect adjustment values.
PastPaper.question 16 · multiple_choice
1 PastPaper.marks
The total costs of production at different activity levels for a business are as follows: At 5,000 units, the total cost is \(\$40,000\); At 10,000 units, the total cost is \(\$70,000\); At 15,000 units, the total cost is \(\$100,000\). What is the expected total cost for 12,000 units of production?
A.\(\$82,000\)
B.\(\$84,000\)
C.\(\$96,000\)
D.\(\$72,000\)
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
Using the high-low method to find the cost behaviour: 1. Variable Cost (VC) per unit = \((\$100,000 - \$40,000) / (15,000 - 5,000) = \$60,000 / 10,000 = \$6\) per unit. 2. Fixed Cost (FC) = Total cost at 5,000 units - (5,000 units \(\times \$6\)) = \(\$40,000 - \$30,000 = \$10,000\). 3. Total cost at 12,000 units = Fixed Cost + (12,000 units \(\times \$6\)) = \(\$10,000 + \$72,000 = \$82,000\).
PastPaper.markingScheme
1 mark for the correct answer: \(\$82,000\). 0 marks if the candidate assumed purely variable behaviour.
PastPaper.question 17 · multiple_choice
1 PastPaper.marks
On 1 January, a company has 400,000 ordinary shares of $0.50 each and a share premium account balance of $80,000. On 1 March, it makes a rights issue of 1 share for every 4 held at $0.75 per share, which is fully subscribed. On 1 September, it makes a bonus issue of 1 share for every 5 held, using the share premium account to fund it. What is the balance on the share premium account after these transactions?
A.$55,000
B.$75,000
C.$105,000
D.$130,000
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
Step 1: Calculate the rights issue. Total shares held = 400,000. Rights issue of 1 for 4 means 100,000 new shares are issued. Premium per share = $0.75 - $0.50 = $0.25. Increase in share premium = 100,000 * $0.25 = $25,000. New share premium balance = $80,000 + $25,000 = $105,000. Total shares now in issue = 500,000. Step 2: Calculate the bonus issue. Bonus issue of 1 for 5 means 100,000 bonus shares are issued. These must be issued at nominal value ($0.50 each). Total cost of the bonus issue = 100,000 * $0.50 = $50,000. This is funded from the share premium account. Final share premium balance = $105,000 - $50,000 = $55,000.
PastPaper.markingScheme
Award 1 mark for the correct option A. No partial marks apply.
PastPaper.question 18 · multiple_choice
1 PastPaper.marks
A company manufactures two products, Product A and Product B. The following information is available: Product A: Selling Price $50, Direct Materials $15, Direct Labour (paid at $10 per hour) $20, Variable Overhead $5. Product B: Selling Price $60, Direct Materials $20, Direct Labour (paid at $10 per hour) $15, Variable Overhead $7. Direct labour hours are in short supply and represent the limiting factor. What is the contribution per direct labour hour for Product A and Product B?
A.Product A: $5.00; Product B: $12.00
B.Product A: $10.00; Product B: $18.00
C.Product A: $2.50; Product B: $9.00
D.Product A: $15.00; Product B: $15.00
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
Step 1: Calculate the contribution per unit. Product A: $50 - ($15 + $20 + $5) = $10. Product B: $60 - ($20 + $15 + $7) = $18. Step 2: Calculate the direct labour hours required per unit. Product A: $20 / $10 per hour = 2 hours. Product B: $15 / $10 per hour = 1.5 hours. Step 3: Calculate the contribution per direct labour hour. Product A: $10 / 2 hours = $5.00. Product B: $18 / 1.5 hours = $12.00.
PastPaper.markingScheme
Award 1 mark for the correct option A. No partial marks apply.
PastPaper.question 19 · multiple_choice
1 PastPaper.marks
A company provides the following financial information for its financial year: Revenue: $600,000 (of which 80% is credit sales), Cost of sales: $450,000, Opening Trade Receivables: $40,000, Closing Trade Receivables: $48,000. Using average trade receivables and a 365-day year, what is the trade receivables turnover in days (rounded to the nearest whole day)?
Award 1 mark for the correct option A. No partial marks apply.
PastPaper.question 20 · multiple_choice
1 PastPaper.marks
A company manufactures a single product with a selling price of $20 per unit and a variable cost of $12 per unit. Annual fixed costs are $36,000. The company is considering purchasing a new machine. This will increase annual fixed costs by $12,000 but will reduce the variable cost per unit by $2.00. What will be the new break-even point in units?
A.4,800 units
B.4,500 units
C.6,000 units
D.3,600 units
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
Step 1: Calculate new fixed costs = $36,000 + $12,000 = $48,000. Step 2: Calculate new variable cost per unit = $12.00 - $2.00 = $10.00. Step 3: Calculate new contribution per unit = $20.00 - $10.00 = $10.00. Step 4: Calculate new break-even point = New Fixed Costs / New Contribution per unit = $48,000 / $10.00 = 4,800 units.
PastPaper.markingScheme
Award 1 mark for the correct option A. No partial marks apply.
PastPaper.question 21 · multiple_choice
1 PastPaper.marks
A business purchased a machine on 1 January 2021 for $80,000. It is depreciated at 20% per annum using the reducing balance method on a pro-rata basis for partial years. On 31 December 2022, the machine was revalued upwards to $55,000. On 30 June 2023, the machine was sold for $48,000. What was the profit or loss on disposal of the machine?
A.Loss of $1,500
B.Loss of $7,000
C.Profit of $1,920
D.Profit of $4,000
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
Step 1: Net Book Value (NBV) on 31 Dec 2021 = $80,000 - (20% * $80,000) = $64,000. Step 2: NBV on 31 Dec 2022 before revaluation = $64,000 - (20% * $64,000) = $51,200. Step 3: Revalued amount on 31 Dec 2022 = $55,000. Step 4: Depreciation for 2023 up to date of disposal (6 months) = 20% * $55,000 * 6/12 = $5,500. Step 5: NBV at disposal (30 June 2023) = $55,000 - $5,500 = $49,500. Step 6: Loss on disposal = Sale proceeds - NBV = $48,000 - $49,500 = Loss of $1,500.
PastPaper.markingScheme
Award 1 mark for the correct option A. No partial marks apply.
PastPaper.question 22 · multiple_choice
1 PastPaper.marks
At 31 October, a company’s cash book showed a bank overdraft of $8,400. The following differences were found when comparing the cash book to the bank statement: 1. Bank charges of $250 on the bank statement had not been entered in the cash book. 2. Unpresented cheques amounted to $1,800. 3. An automated payment of $400 from a customer had been credited by the bank but not recorded in the cash book. 4. Deposits in transit (uncredited bankings) at the end of the month were $2,950. What was the balance shown on the bank statement at 31 October?
A.$9,400 overdrawn
B.$7,100 overdrawn
C.$8,250 overdrawn
D.$9,550 overdrawn
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
Step 1: Adjust the cash book balance. Adjusted cash book balance = -$8,400 (overdraft) - $250 (bank charges) + $400 (automated credit) = -$8,250. Step 2: Reconcile to the bank statement. Adjusted cash book balance = Bank statement balance + Deposits in transit - Unpresented cheques. -$8,250 = Bank statement balance + $2,950 - $1,800. -$8,250 = Bank statement balance + $1,150. Bank statement balance = -$8,250 - $1,150 = -$9,400 (overdrawn).
PastPaper.markingScheme
Award 1 mark for the correct option A. No partial marks apply.
PastPaper.question 23 · multiple_choice
1 PastPaper.marks
The trial balance of a business did not balance, and the difference was placed in a suspense account. The following errors were later discovered: 1. A purchase of equipment for $6,000 had been debited to the purchases account. 2. A payment of $350 to a supplier, J. Smith, had been correctly entered in the cash book but debited to J. Smyth’s account as $530. 3. Rent received of $900 had been debited to the rent receivable account and credited to the bank account. Which of these errors would require an entry in the suspense account to correct them?
A.2 only
B.1 and 2 only
C.2 and 3 only
D.1, 2 and 3
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
Error 1 is an error of principle. It does not affect the agreement of the trial balance, so no suspense account is needed. Error 2 has a credit entry of $350 and a debit entry of $530, causing unequal total debits and credits, which requires a suspense account entry to correct. Error 3 is an error of complete reversal. Debits still equal credits (both are $900), so the trial balance still balances, and no suspense account is needed. Therefore, only Error 2 requires a suspense account entry.
PastPaper.markingScheme
Award 1 mark for the correct option A. No partial marks apply.
PastPaper.question 24 · multiple_choice
1 PastPaper.marks
A sole trader provides the following information: Opening inventory: $24,000, Closing inventory: $28,000, Purchases: $180,000, Goods taken by the owner for personal use (selling price $3,000). The trader applies a constant mark-up of 20% on all goods. What is the Cost of Sales for the year?
A.$173,500
B.$173,000
C.$173,600
D.$176,000
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
Step 1: Convert the selling price of drawings to cost. Cost of drawings = $3,000 / 1.20 = $2,500. Step 2: Adjust purchases for drawings. Adjusted purchases = $180,000 - $2,500 = $177,500. Step 3: Calculate cost of sales. Cost of sales = Opening inventory + Adjusted purchases - Closing inventory = $24,000 + $177,500 - $28,000 = $173,500.
PastPaper.markingScheme
Award 1 mark for the correct option A. No partial marks apply.
PastPaper.question 25 · multiple_choice
1 PastPaper.marks
A company has an ordinary share capital of \( \$200,000 \) (shares of \( \$0.50 \) each) and a share premium account balance of \( \$40,000 \). It makes a rights issue of 1 share for every 4 shares held at a price of \( \$0.80 \) per share. The issue was fully subscribed. The company then makes a bonus issue of 1 share for every 10 shares held, using the share premium account to fund this issue. What is the balance on the share premium account after these transactions?
A.\( \$15,000 \)
B.\( \$45,000 \)
C.\( \$70,000 \)
D.\( \$95,000 \)
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
1. Calculate original number of shares: \( \$200,000 / \$0.50 = 400,000 \) shares. 2. Calculate rights issue shares: \( 400,000 / 4 = 100,000 \) shares. 3. Calculate share premium from rights issue: \( 100,000 \times (\$0.80 - \$0.50) = \$30,000 \). 4. Balance before bonus issue: \( \$40,000 + \$30,000 = \$70,000 \). 5. Total shares before bonus issue: \( 400,000 + 100,000 = 500,000 \) shares. 6. Calculate bonus issue shares: \( 500,000 / 10 = 50,000 \) shares. 7. Capitalized value of bonus shares (at nominal value): \( 50,000 \times \$0.50 = \$25,000 \). 8. Final Share Premium balance: \( \$70,000 - \$25,000 = \$45,000 \).
PastPaper.markingScheme
1 mark for the correct selection of B. Award 0 marks for any other option.
PastPaper.question 26 · multiple_choice
1 PastPaper.marks
A company has sufficient spare capacity to accept a special order for 2,000 units of its single product at an export price of \( \$28 \) per unit. The normal selling price is \( \$35 \) per unit. The unit costs are: Direct materials \( \$12 \), Direct labour \( \$8 \), Variable overheads \( \$4 \), and Allocated fixed overheads \( \$5 \). To fulfill this order, the company must rent a special machine costing \( \$3,000 \). What is the effect on the company's profit if the special order is accepted?
A.\( \$5,000 \) decrease
B.\( \$3,000 \) increase
C.\( \$5,000 \) increase
D.\( \$8,000 \) increase
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
1. Identify relevant variable costs per unit: Direct materials (\( \$12 \)) + Direct labour (\( \$8 \)) + Variable overheads (\( \$4 \)) = \( \$24 \). 2. Note that allocated fixed overheads of \( \$5 \) are non-incremental and should be ignored. 3. Contribution per unit: \( \$28 \text{ (selling price)} - \$24 = \$4 \). 4. Total contribution from special order: \( 2,000 \text{ units} \times \$4 = \$8,000 \). 5. Subtract incremental fixed costs (machine rental): \( \$8,000 - \$3,000 = \$5,000 \) increase in profit.
PastPaper.markingScheme
1 mark for the correct selection of C. Award 0 marks for any other option.
PastPaper.question 27 · multiple_choice
1 PastPaper.marks
At the end of financial year 1, a company had credit sales of \( \$720,000 \) and year-end trade receivables of \( \$90,000 \). For year 2, the credit manager plans to reduce the trade receivables collection period to 30 days. Assuming credit sales remain at \( \$720,000 \) and a 360-day year is used, what is the required decrease in the year-end trade receivables balance?
A.\( \$20,000 \)
B.\( \$30,000 \)
C.\( \$60,000 \)
D.\( \$90,000 \)
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
1. Calculate current year-end collection period: \( (\$90,000 / \$720,000) \times 360 = 45 \) days. 2. Calculate required trade receivables balance for a 30-day collection period: \( (30 / 360) \times \$720,000 = \$60,000 \). 3. Calculate the decrease in trade receivables: \( \$90,000 - \$60,000 = \$30,000 \).
PastPaper.markingScheme
1 mark for the correct selection of B. Award 0 marks for any other option.
PastPaper.question 28 · multiple_choice
1 PastPaper.marks
A business currently sells 8,000 units of a product per year. The current selling price is \( \$20 \) per unit, the variable cost is \( \$12 \) per unit, and fixed costs are \( \$48,000 \) per year. The business plans to increase the selling price to \( \$22 \) per unit, which is expected to reduce the sales volume by 10%. What will be the new margin of safety in units?
A.1,200 units
B.2,000 units
C.2,400 units
D.3,200 units
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
1. Calculate the new sales volume: \( 8,000 \text{ units} \times 90\% = 7,200 \text{ units} \). 2. Calculate the new contribution per unit: \( \$22 - \$12 = \$10 \). 3. Calculate the new break-even point: \( \$48,000 / \$10 = 4,800 \text{ units} \). 4. Calculate the new margin of safety in units: \( 7,200 \text{ units} - 4,800 \text{ units} = 2,400 \text{ units} \).
PastPaper.markingScheme
1 mark for the correct selection of C. Award 0 marks for any other option.
PastPaper.question 29 · multiple_choice
1 PastPaper.marks
On 1 January 2021, an asset was purchased for \( \$120,000 \). The company's policy is to charge depreciation at 20% per annum using the reducing balance method. A full year's depreciation is charged in the year of purchase and none in the year of disposal. On 31 December 2023, the asset was sold for \( \$58,000 \). What was the profit or loss on disposal of the asset?
A.\( \$3,440 \) loss
B.\( \$14,000 \) loss
C.\( \$18,800 \) loss
D.\( \$18,800 \) profit
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
1. Year 2021 Depreciation: \( 20\% \times \$120,000 = \$24,000 \). Net Book Value (NBV) on 31 Dec 2021 = \( \$96,000 \). 2. Year 2022 Depreciation: \( 20\% \times \$96,000 = \$19,200 \). NBV on 31 Dec 2022 = \( \$76,800 \). 3. Year 2023 Depreciation: \( \$0 \) (none is charged in the year of disposal as per policy). 4. Loss on disposal = NBV at date of disposal (\( \$76,800 \)) - Disposal proceeds (\( \$58,000 \)) = \( \$18,800 \) loss.
PastPaper.markingScheme
1 mark for the correct selection of C. Award 0 marks for any other option.
PastPaper.question 30 · multiple_choice
1 PastPaper.marks
At 31 October, a company's bank statement shows a credit balance of \( \$3,500 \). The following details are identified: 1. Bank charges of \( \$120 \) have not been entered in the cash book. 2. A cheque for \( \$450 \) sent to a supplier has not been presented to the bank. 3. A cheque received from a customer for \( \$800 \) has been entered in the cash book but not yet credited by the bank. 4. A customer paid \( \$300 \) directly into the bank account (not yet recorded in the cash book).
What was the cash book balance before any adjustments were made?
A.\( \$3,500 \)
B.\( \$3,670 \)
C.\( \$3,850 \)
D.\( \$4,030 \)
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
1. Calculate corrected cash book balance (using bank reconciliation): Bank statement credit balance (\( \$3,500 \)) + Uncredited deposits (\( \$800 \)) - Unpresented cheques (\( \$450 \)) = \( \$3,850 \). 2. To find the unadjusted cash book balance, reverse the adjustments made in the cash book: Corrected cash book balance (\( \$3,850 \)) + Bank charges (\( \$120 \)) - Credit transfer (\( \$300 \)) = \( \$3,670 \).
PastPaper.markingScheme
1 mark for the correct selection of B. Award 0 marks for any other option.
Section B: Paper 23
Answer all 4 structured calculation and financial preparation questions.
Zephyr Ltd provided the following trial balance information and additional adjustments for the year ended 31 December 2023. Draft profit for the year before adjustments was $145,000. The following adjustments have not yet been recorded: 1. Depreciation on machinery of $12,000. 2. The allowance for doubtful debts is to be increased by $1,500. 3. Administrative expenses prepaid were $2,500. 4. Distribution costs accrued were $4,000. Balances on capital and reserves at 1 January 2023 were: Ordinary Shares ($0.50 nominal value): $300,000; Share Premium: $50,000; General Reserve: $40,000; Retained Earnings: $85,000. The following transactions took place during 2023: 1. On 1 April 2023, paid a final dividend of $0.05 per share on ordinary shares in issue at 1 January 2023. 2. On 1 June 2023, made a 1-for-4 bonus issue of ordinary shares, funded from the Share Premium account to the maximum extent possible, then from the General Reserve. 3. On 1 October 2023, issued 100,000 new ordinary shares at a price of $0.80 per share. 4. On 31 December 2023, the directors transferred $15,000 to the General Reserve. Required: (a) Calculate the revised profit for the year ended 31 December 2023. [6 marks] (b) Prepare the Statement of Changes in Equity for the year ended 31 December 2023. [12 marks] (c) Explain the difference between capital reserves and revenue reserves, providing one example of each. [4.5 marks]
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
(a) Calculation of revised profit: Draft profit: $145,000. Less: Depreciation on machinery: $12,000. Less: Increase in allowance for doubtful debts: $1,500. Add: Prepaid administrative expenses: $2,500. Less: Accrued distribution costs: $4,000. Revised Profit: $130,000. (b) Statement of Changes in Equity for the year ended 31 December 2023: Columns: Ordinary Share Capital (OSC), Share Premium (SP), General Reserve (GR), Retained Earnings (RE), Total. Balances at 1 Jan 2023: OSC: $300,000, SP: $50,000, GR: $40,000, RE: $85,000, Total: $475,000. Dividend paid: RE: ($30,000), Total: ($30,000) [600,000 shares * $0.05]. Bonus issue: OSC: $75,000, SP: ($50,000), GR: ($25,000), Total: $0. Issue of shares: OSC: $50,000, SP: $30,000, Total: $80,000 [100,000 shares * $0.50 nominal and $0.30 premium]. Profit for the year: RE: $130,000, Total: $130,000. Transfer to General Reserve: GR: $15,000, RE: ($15,000), Total: $0. Balances at 31 Dec 2023: OSC: $425,000, SP: $30,000, GR: $30,000, RE: $170,000, Total: $655,000. (c) Capital reserves are created from non-operating activities and are generally not distributable as cash dividends by law (e.g., Share Premium or Revaluation Reserve). Revenue reserves are created from normal trading activities and are distributable as dividends (e.g., General Reserve or Retained Earnings).
PastPaper.markingScheme
Part (a): [6 marks total] - Draft profit (no mark) - Less Depreciation: 1 mark - Less Increase in allowance: 1 mark - Add prepaid expenses: 1 mark - Less accrued costs: 1 mark - Correct calculation of revised profit: 2 marks (accuracy). Part (b): [12 marks total] - Balances at 1 Jan: 1 mark for row - Dividend paid: 2 marks (1 method, 1 accuracy) - Bonus issue: 3 marks (1 method, 2 accuracy - checking split of SP and GR) - Share issue: 2 marks (1 OSC, 1 SP) - Profit for the year: 1 mark - Transfer to GR: 1 mark - Final balances: 2 marks (all correct). Part (c): [4.5 marks total] - Explanation of capital reserves: 1.5 marks - Explanation of revenue reserves: 1.5 marks - Correct examples: 1.5 marks (0.75 each).
Kelso Ltd manufactures three products: X, Y, and Z. The following standard unit costs and selling prices are available: Selling price: X = $60, Y = $80, Z = $110. Direct Materials ($4 per kg): X = $16, Y = $20, Z = $32. Direct Labour ($12 per hour): X = $12, Y = $18, Z = $24. Variable Overhead: X = $4, Y = $6, Z = $8. Maximum monthly demand is: Product X = 2,000 units; Product Y = 1,500 units; Product Z = 1,000 units. For next month, only 19,500 kg of direct materials are available. Required: (a) Show by calculation whether the available materials are sufficient to meet the maximum monthly demand. [3 marks] (b) Calculate the contribution per unit and contribution per kg of direct materials for each product, and rank them in order of priority. [6 marks] (c) Determine the optimal production plan to maximize monthly profit, and calculate the total contribution from this plan. [9.5 marks] (d) Explain three ways Kelso Ltd could overcome the material shortage in the long term. [4 marks]
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
(a) Material requirement for maximum demand: Product X: 2,000 units * 4 kg = 8,000 kg. Product Y: 1,500 units * 5 kg = 7,500 kg. Product Z: 1,000 units * 8 kg = 8,000 kg. Total material required = 23,500 kg. Available material = 19,500 kg. Shortage = 4,000 kg. The available materials are not sufficient. (b) Contribution per unit: X = $60 - ($16 + $12 + $4) = $28; Y = $80 - ($20 + $18 + $6) = $36; Z = $110 - ($32 + $24 + $8) = $46. Contribution per kg: X = $28 / 4 kg = $7.00; Y = $36 / 5 kg = $7.20; Z = $46 / 8 kg = $5.75. Ranking: 1st: Product Y, 2nd: Product X, 3rd: Product Z. (c) Optimal Production Plan: 1st: Produce Y (1,500 units): uses 1,500 * 5 kg = 7,500 kg. Remaining material = 12,000 kg. 2nd: Produce X (2,000 units): uses 2,000 * 4 kg = 8,000 kg. Remaining material = 4,000 kg. 3rd: Produce Z: remaining 4,000 kg / 8 kg per unit = 500 units of Z. Total Contribution: Y: 1,500 * $36 = $54,000; X: 2,000 * $28 = $56,000; Z: 500 * $46 = $23,000. Total Contribution = $133,000. (d) Long-term measures: 1. Source alternative suppliers of raw materials. 2. Redesign products to reduce material consumption. 3. Improve production efficiency to minimize material wastage.
PastPaper.markingScheme
Part (a): [3 marks total] - Calculation of total material required: 2 marks - Identification of shortage: 1 mark. Part (b): [6 marks total] - Contribution per unit calculations: 1.5 marks (0.5 per product) - Contribution per kg calculations: 3 marks (1 per product) - Rankings: 1.5 marks. Part (c): [9.5 marks total] - Plan for Product Y: 2 marks (units and kg used) - Plan for Product X: 2 marks (units and kg used) - Plan for Product Z: 2.5 marks (units and kg used) - Calculation of total contribution: 3 marks. Part (d): [4 marks total] - 1 mark per valid long-term point up to 3 marks, plus 1 mark for professional phrasing.
Orion plc provided the following financial information for the years ended 31 December 2022 and 2023: Income Statement items: Revenue (2022: $800,000, 2023: $950,000); Cost of Sales (2022: $480,000, 2023: $617,500); Operating Expenses (2022: $160,000, 2023: $190,000); Finance Costs (2022: $20,000, 2023: $25,000); Profit for the year (2022: $140,000, 2023: $117,500). Statement of Financial Position items: Non-current Assets at carrying value (2022: $450,000, 2023: $550,000); Inventory (2022: $60,000, 2023: $85,000); Trade Receivables (2022: $70,000, 2023: $95,000); Bank Balance (2022: $15,000 debit, 2023: $12,000 credit/overdraft); Trade Payables (2022: $55,000, 2023: $78,000); Ordinary Share Capital (2022: $300,000, 2023: $300,000); Retained Earnings (2022: $40,000, 2023: $90,000); 10% Debentures (2022: $200,000, 2023: $250,000). Required: (a) Calculate the following ratios for 2022 and 2023 (to two decimal places): 1. Gross margin (%), 2. Operating margin (%), 3. Return on Capital Employed (ROCE) (%) (using operating profit / capital employed), 4. Current ratio, 5. Liquid (acid test) ratio. [11 marks] (b) Analyze the profitability and liquidity of Orion plc over the two-year period, suggesting possible reasons for the changes. [7.5 marks] (c) State three limitations of using financial ratios for analyzing company performance. [4.5 marks]
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
(a) Calculations: 1. Gross Margin: 2022: ($320,000 GP / $800,000) * 100 = 40.00%; 2023: ($332,500 GP / $950,000) * 100 = 35.00%. 2. Operating Margin: 2022: ($160,000 OP / $800,000) * 100 = 20.00%; 2023: ($142,500 OP / $950,000) * 100 = 15.00%. 3. ROCE (Capital Employed = OSC + RE + Debentures): 2022 CE: $300,000 + $40,000 + $200,000 = $540,000. ROCE = ($160,000 / $540,000) * 100 = 29.63%. 2023 CE: $300,000 + $90,000 + $250,000 = $640,000. ROCE = ($142,500 / $640,000) * 100 = 22.27%. 4. Current Ratio: 2022: ($60,000 + $70,000 + $15,000) / $55,000 = 2.64:1; 2023: ($85,000 + $95,000) / ($78,000 + $12,000) = 2.00:1. 5. Liquid (Acid Test) Ratio: 2022: ($70,000 + $15,000) / $55,000 = 1.55:1; 2023: $95,000 / $90,000 = 1.06:1. (b) Analysis: Profitability deteriorated. Gross margin fell by 5% and operating margin fell by 5%, indicating higher raw material costs or competitive price cuts, and poor control over operational costs. ROCE fell from 29.63% to 22.27% due to lower profitability and an increased capital base. Liquidity also deteriorated. The current ratio and acid test both fell, though they remain near acceptable standards. However, cash status changed from a positive cash balance of $15,000 to an overdraft of $12,000, as cash is now tied up in larger inventory and receivable holdings. (c) Limitations: 1. Ratio analysis relies on historical data, which might not represent future prospects. 2. Differences in accounting policies make cross-company comparisons difficult. 3. Financial statements can be 'window-dressed' to present a better-than-actual position.
PastPaper.markingScheme
Part (a): [11 marks total] - Gross margin (2022 & 2023): 2 marks - Operating margin (2022 & 2023): 2 marks - ROCE (calculation of capital employed and ROCE for both years): 3 marks - Current ratio: 2 marks - Acid test: 2 marks. Part (b): [7.5 marks total] - Profitability discussion and reasons (GP margin, OP margin, ROCE): 3.5 marks - Liquidity discussion and reasons (current, acid test, cash/bank overdraft analysis): 4 marks. Part (c): [4.5 marks total] - 1.5 marks per valid limit of ratio analysis (up to 3 points).
Vanguard Ltd manufactures a single product, the 'Titan'. The following data is available: Selling price: $50 per unit; Direct materials: $15 per unit; Direct labour: $10 per unit; Variable overheads: $5 per unit; Fixed costs: $180,000 per annum; Current annual sales: 12,000 units. Required: (a) Calculate for the current year: 1. Contribution per unit, 2. Break-even point in units and sales value, 3. Margin of safety as a percentage of sales, 4. Profit or loss for the year. [11 marks] (b) The directors are considering two options for next year: Option 1: Purchase higher-quality direct materials costing an additional $3 per unit. This increases selling price to $58. Fixed costs remain unchanged. Sales volume is expected to increase by 10%. Option 2: Invest in automated machinery. This increases fixed costs by $45,000, but reduces direct labour by $4 per unit. Selling price and other variables remain unchanged. Sales volume is expected to rise to 14,000 units. Prepare calculations to show the expected profit under both Option 1 and Option 2, and advise which option they should choose. [8.5 marks] (c) State three assumptions of cost-volume-profit (CVP) analysis. [3 marks]
PastPaper.showAnswersPastPaper.hideAnswers
PastPaper.workedSolution
(a) Current year calculations: 1. Contribution per unit = $50 - ($15 + $10 + $5) = $20. 2. Break-even point (units) = $180,000 / $20 = 9,000 units. Break-even value = 9,000 * $50 = $450,000. 3. Margin of safety = (12,000 - 9,000) / 12,000 * 100 = 25%. 4. Profit = (12,000 * $20) - $180,000 = $60,000. (b) Option Evaluation: Option 1: New unit VC = $33 (materials $18 + labor $10 + overheads $5). New contribution = $58 - $33 = $25. New volume = 13,200 units. Total contribution = 13,200 * $25 = $330,000. Less fixed costs = $180,000. Expected Profit = $150,000. Option 2: New unit VC = $26 (materials $15 + labor $6 + overheads $5). New contribution = $50 - $26 = $24. New volume = 14,000 units. Total contribution = 14,000 * $24 = $336,000. Less fixed costs = $225,000. Expected Profit = $111,000. Advice: Choose Option 1. It yields a significantly higher profit ($150,000 compared to $111,000) and keeps fixed cost risk low ($180,000 vs $225,000). (c) Assumptions: 1. Selling price per unit remains constant. 2. Costs can be completely partitioned into fixed and variable. 3. Volume of production equals volume of sales.
PastPaper.markingScheme
Part (a): [11 marks total] - 1. Contribution per unit: 2 marks (1 method, 1 accuracy) - 2. BEP units: 2 marks, BEP sales value: 2 marks - 3. Margin of safety %: 3 marks (1 method, 2 accuracy) - 4. Profit: 2 marks. Part (b): [8.5 marks total] - Option 1 Profit calculation: 3 marks - Option 2 Profit calculation: 3 marks - Comparison & Advice (risk/reward trade-off mentioned): 2.5 marks. Part (c): [3 marks total] - 1 mark per valid assumption stated.