2026 Cambridge IAS-Level Accounting (9706) Practice Paper with Answers

1. Initial ordinary shares = 400 000 shares of $0.50 each = $200 000.
2. Bonus issue: 1 for 4 = \(400\,000 / 4 = 100\,000\) new ordinary shares.
Nominal value of bonus issue = \(100\,000 \times \$0.50 = \$50\,000\).
Share premium used for bonus issue = $50 000.
Remaining share premium = \(\$60\,000 - \$50\,000 = \$10\,000\).
3. Total ordinary shares after bonus issue = \(400\,000 + 100\,000 = 500\,000\) shares.
4. Rights issue: 1 for 5 = \(500\,000 / 5 = 100\,000\) new ordinary shares.
Issue price = $0.80 per share, nominal value = $0.50, premium per share = \(\$0.80 - \$0.50 = \$0.30\).
Total premium from rights issue = \(100\,000 \times \$0.30 = \$30\,000\).
5. Final balance on share premium account = \(\$10\,000 + \$30\,000 = \$40\,000\).

A is correct ($40 000).
B ($30 000) incorrectly omits the remaining balance of $10 000 from the initial share premium.
C ($48 000) calculates the rights issue based on the original 400 000 shares before the bonus issue (80 000 shares * $0.30 = $24 000; $24 000 + $24 000 or similar error).
D ($90 000) ignores the reduction in share premium caused by the bonus issue.

Adjustments to the individual balances in the purchases ledger (not the control account):
- Unadjusted total = $54 300
- Error 1: Contra omitted from supplier's account: deduct $1 200.
- Error 2: Overcast of purchases journal affects the control account only.
- Error 3: Invoice entered as $540 instead of $450 in supplier's account (overstated by $90): deduct $90.
- Error 4: Control account posting error affects the control account only.

Corrected total = \(\$54\,300 - \$1\,200 - \$90 = \$53\,010\).

B is correct ($53 010).
A ($52 920) deducts the $90 error twice or includes control account errors.
C ($53 190) adds the $90 overstatement instead of subtracting it ($54 300 - $1 200 + $90 = $53 190).
D ($55 410) adds the contra entry instead of deducting it.

Step 1: Calculate the updated / correct bank balance from the bank statement:
Bank statement balance (credit = asset) = +$8 450
Add: Uncredited deposits = +$1 680
Less: Unpresented cheques = -$2 140
Corrected Cash Book balance = \(\$8\,450 + \$1\,680 - \$2\,140 = \$7\,990\) (debit balance).

Step 2: Reverse the unrecorded cash book items to find the original cash book balance:
Corrected Cash Book balance = $7 990
Direct debit of $260 not entered (which reduces cash book) -> add back $260
Dishonoured cheque of $310 not entered (which reduces cash book) -> add back $310
Original Cash Book balance = \(\$7\,990 + \$260 + \$310 = \$8\,560\) debit.

D is correct ($8 560 debit).
A ($7 420 debit) subtracts the direct debit and dishonoured cheque from the corrected cash book balance.
B ($7 990 debit) gives the corrected cash book balance rather than the balance before adjustments.
C ($8 040 debit) incorrectly adds unpresented cheques and subtracts uncredited deposits.

Retained earnings calculation:
- Opening retained earnings = $142 000
- Add: Profit for the year = +$98 000
- Less: Transfer to general reserve = -$20 000
- Less: Interim dividend paid = \(600\,000 \times \$0.04 = -\$24\,000\)
- Note 1: Proposed dividends are not recognised as liabilities or deducted from retained earnings until approved (after the reporting period).
- Note 2: Upward revaluation of property is credited to the revaluation reserve, not retained earnings.

Closing retained earnings = \(\$142\,000 + \$98\,000 - \$20\,000 - \$24\,000 = \$196\,000\).

C is correct ($196 000).
A ($160 000) incorrectly deducts the proposed dividend ($36 000).
B ($176 000) fails to deduct the transfer to the general reserve and includes proposed dividend.
D ($246 000) incorrectly includes the $50 000 revaluation gain in retained earnings.

1. Direct labour hours per unit:
- Product X: \(\frac{\$18}{\$12} = 1.5\) hours
- Product Y: \(\frac{\$12}{\$12} = 1.0\) hour

2. Contribution per unit:
- Product X: \(\$45 - (\$15 + \$18 + \$4) = \$45 - \$37 = \$8\)
- Product Y: \(\$60 - (\$24 + \$12 + \$6) = \$60 - \$42 = \$18\)

3. Contribution per direct labour hour (limiting factor):
- Product X: \(\frac{\$8}{1.5\text{ hrs}} = \$5.33\) per hour
- Product Y: \(\frac{\$18}{1.0\text{ hr}} = \$18.00\) per hour

4. Ranking: Product Y (1st), Product X (2nd).

5. Allocation of 4 800 direct labour hours:
- Produce maximum demand of Product Y: \(2\,000\text{ units} \times 1.0\text{ hr} = 2\,000\text{ hours}\).
- Remaining hours = \(4\,800 - 2\,000 = 2\,800\text{ hours}\).
- Produce Product X: \(\frac{2\,800\text{ hours}}{1.5\text{ hours/unit}} = 1\,866.67\) units (or 1 866 units).
Total contribution from Y = \(2\,000 \times \$18 = \$36\,000\).
Total contribution from X = \(2\,800\text{ hours} \times \$5.3333\text{/hr} = \$14\,933.33\) (or \(1\,866.67 \times \$8 = \$14\,933.33\)).
Total maximum contribution = \(\$36\,000 + \$14\,933.33 = \$50\,933.33\) (to nearest dollar $50 933).

Alternatively, if 1 866 whole units are made: \(2\,000 \times \$18 + 1\,866 \times \$8 = \$36\,000 + \$14\,928 = \$50\,928\).
Let's check the options: A $45 600, B $50 933, C $56 000, D $65 600.

B is correct ($50 933).
A ($45 600) prioritises Product X first: 2 500 units of X use 3 750 hrs (contribution $20 000), leaving 1 050 hrs for 1 050 units of Y (contribution $18 900) -> total $38 900, or misunderstands allocation.
C ($56 000) calculates total contribution if demand for both was unconstrained by hours ($20 000 + $36 000).
D ($65 600) incorrectly includes total revenue or ignores variable costs.

1. New selling price = \(\$80 \times 0.90 = \$72\).
2. New contribution per unit = \(\$72 - \$48 = \$24\).
3. New total fixed costs = \(\$192\,000 + \$18\,000 = \$210\,000\).
4. New break-even point in units = \(\frac{\$210\,000}{\$24} = 8\,750\text{ units}\).
5. New margin of safety in units = \(\text{Budgeted sales} - \text{Break-even sales} = 9\,000 - 8\,750 = 250\text{ units}\).

A is correct (250 units).
B (1 000 units) ignores the increase in advertising fixed costs: $192 000 / $24 = 8 000 units; 9 000 - 8 000 = 1 000 units.
C (2 417 units) uses original contribution per unit ($32): $210 000 / $32 = 6 562.5 units; 9 000 - 6 563 = 2 437 units.
D (3 000 units) uses original break-even point: $192 000 / $32 = 6 000 units; 9 000 - 6 000 = 3 000 units.

1. Cost on 1 January 2023 = $80 000
2. Depreciation for 2023 (Year 1) = \(20\% \times \$80\,000 = \$16\,000\)
Carrying amount at 31 Dec 2023 = \(\$80\,000 - \$16\,000 = \$64\,000\)
3. Depreciation for 2024 (Year 2) = \(20\% \times \$64\,000 = \$12\,800\)
Carrying amount at 31 Dec 2024 = \(\$64\,000 - \$12\,800 = \$51\,200\)
4. Depreciation for 2025: None, as no depreciation is charged in the year of disposal.
5. Carrying amount at date of disposal = $51 200
6. Disposal proceeds (Part-exchange allowance) = $46 000
7. Loss on disposal = \(\text{Disposal proceeds} - \text{Carrying amount} = \$46\,000 - \$51\,200 = -\$5\,200\) (Loss of $5 200).

D is correct ($5 200 loss).
A ($5 200 profit) confuses the sign of profit and loss.
B ($2 000 loss) uses straight-line depreciation of 20% on cost for 2 years (Accumulated dep = $32 000, Carrying amount = $48 000, Loss = $48 000 - $46 000 = $2 000).
C ($5 040 profit) incorrectly calculates 3 years of reducing balance depreciation (Carrying amount = $40 960, Profit = $46 000 - $40 960 = $5 040).

1. Average inventory = \(\frac{\$68\,000 + \$82\,000}{2} = \$75\,000\).
2. Rate of inventory turnover (times) = \(\frac{\text{Cost of sales}}{\text{Average inventory}} = \frac{\$450\,000}{\$75\,000} = 6.0\text{ times}\).
3. Trade receivables turnover (days) = \(\frac{\text{Trade receivables}}{\text{Credit sales}} \times 365 = \frac{\$96\,000}{\$720\,000} \times 365 = 48.67\text{ days} \approx 49\text{ days}\).

A is correct (6.0 times, 49 days).
B (6.0 times, 78 days) uses trade payables turnover instead of trade receivables turnover ($60 000 / $450 000 * 365 approx 49 days, or confuses ratios).
C (9.6 times, 49 days) calculates rate of inventory turnover using revenue instead of cost of sales ($720 000 / $75 000 = 9.6 times).
D (5.5 times, 49 days) uses closing inventory instead of average inventory for inventory turnover ($450 000 / $82 000 = 5.49 times).

1. Purchases understated by $720 ($1 800 - $1 080), so draft profit is overstated: decrease profit by $720. 2. Sales returns of $450 should reduce revenue (reduce profit by $450); instead, purchases returns was credited, which reduced cost of sales (increased profit by $450). Total correction: decrease profit by $900 ($450 + $450). 3. Rent received of $620 (income) was entered as rent expense (expense): profit was reduced by $620 instead of increased by $620. Total correction: increase profit by $1 240 ($620 \times 2). Net change to profit = -$720 - $900 + $1 240 = -$380. Corrected profit = $64 500 - $380 = $64 120.

A is correct (1 mark). B results from reversing the rent adjustment. C results from adding rather than subtracting error corrections. D results from doubling the purchase journal error.

Draft sales ledger control account balance = $48 500. 1. Undercast of sales journal: add $600. 2. Individual customer ledger account error: does not affect the control account. 3. Dishonoured cheque omitted from control account: add $320. 4. Contra entry omitted from sales ledger control account: deduct $280. Corrected balance = $48 500 + $600 + $320 - $280 = $49 140.

C is correct (1 mark). A incorrectly includes the individual customer ledger error (-$90) and subtracts dishonoured cheque. B omits the contra entry. D adds the contra entry instead of deducting it.

Number of initial shares = $300 000 / $0.50 = 600 000 shares. Rights issue: 600 000 / 4 = 150 000 shares at $0.80. Premium per share = $0.80 - $0.50 = $0.30. Increase in share premium = 150 000 \times $0.30 = $45 000. Share premium after rights issue = $80 000 + $45 000 = $125 000. Total shares in issue after rights issue = 600 000 + 150 000 = 750 000 shares. Bonus issue: 750 000 / 5 = 150 000 bonus shares at nominal value $0.50 each = $75 000. To preserve revenue reserves, the bonus issue is financed from share premium: $125 000 - $75 000 = $50 000.

A is correct (1 mark). B calculates bonus shares on initial share capital only (600 000 / 5 = 120 000 shares = $60 000). C omits the rights issue premium addition. D omits the bonus issue deduction from share premium.

Profit for the year = Profit from operations - Finance costs = $185 000 - $15 000 = $170 000. Dividends paid during the year = $20 000. Note: The proposed final dividend is not recognised as a liability or deduction in equity until declared/approved. Transfer to general reserve = $30 000. Closing retained earnings = Opening retained earnings ($215 000) + Profit for the year ($170 000) - Interim dividend ($20 000) - Transfer to reserve ($30 000) = $335 000.

B is correct (1 mark). A incorrectly deducts the proposed final dividend ($30 000). C omits the debenture interest ($15 000). D omits the transfer to general reserve ($30 000).

Cost = $60 000. Year ended 31 December 2022 depreciation = 20% \times $60 000 = $12 000. Carrying amount at 31 December 2022 = $48 000. Year ended 31 December 2023 depreciation = 20% \times $48 000 = $9 600. Carrying amount at 31 December 2023 = $38 400. Year ended 31 December 2024: No depreciation charged in the year of disposal. Disposal proceeds (part-exchange value) = $35 000. Loss on disposal = Carrying amount ($38 400) - Proceeds ($35 000) = $3 400 loss.

A is correct (1 mark). B misidentifies the loss as a profit. C incorrectly charges depreciation in the year of disposal ($7 680), giving carrying amount $30 720 and a profit of $4 280. D calculates profit against original cost.

Product X: Total variable cost = $16 + $18 + $4 = $38. Contribution per unit = $50 - $38 = $12. Material per unit = $16 / $4 = 4 kg. Contribution per kg of material = $12 / 4 kg = $3.00. Product Y: Total variable cost = $24 + $24 + $7 = $55. Contribution per unit = $70 - $55 = $15. Material per unit = $24 / $4 = 6 kg. Contribution per kg of material = $15 / 6 kg = $2.50. Ranking: 1st Product X, 2nd Product Y. Production of X = 600 units \times 4 kg = 2 400 kg. Remaining material = 4 200 kg - 2 400 kg = 1 800 kg. Production of Y = 1 800 kg / 6 kg = 300 units.

A is correct (1 mark). B prioritises Product Y based on contribution per unit rather than contribution per limiting factor. C divides available material equally. D exceeds the available material limit.

Current situation: Contribution per unit = $40 - $24 = $16. Break-even point = $96 000 / $16 = 6 000 units. Margin of safety = 8 000 - 6 000 = 2 000 units. Proposed situation: New selling price = $40 \times 1.10 = $44. New contribution per unit = $44 - $24 = $20. New fixed costs = $96 000 + $12 000 = $108 000. New break-even point = $108 000 / $20 = 5 400 units. New margin of safety = 8 000 - 5 400 = 2 600 units. Change in margin of safety = 2 600 - 2 000 = increase of 600 units.

B is correct (1 mark). A calculates the change correctly but reports it as a decrease. C calculates the change in break-even units from target profit incorrectly. D is an arithmetic error.

Predetermined overhead absorption rate = Budgeted overheads / Budgeted hours = $360 000 / 45 000 = $8.00 per direct labour hour. Overheads absorbed = Actual hours \times OAR = 48 500 \times $8.00 = $388 000. Overheads incurred = $378 000. Over-absorption = $388 000 - $378 000 = $10 000 over-absorbed.

A is correct (1 mark). B misidentifies over-absorbed overheads as under-absorbed. C calculates the difference between actual and budgeted overheads ($378 000 - $360 000). D calculates the volume difference incorrectly.

To find the correct trade payables figure, adjust either the Purchases Ledger Control Account or the List of Balances:

Adjusted Purchases Ledger Control Account:
- Starting balance = $28 400
- Error 1 (Purchases journal undercast): $500 credit to purchases ledger control account: $28 400 + $500 = $28 900.

**Adjusted List of Balances:**
- Starting total = $29 150
- Error 2 (Contra omitted from supplier account): -$350
- Error 3 (Supplier balance omitted): +$400
- Error 4 (Invoice overstated in supplier account by $750 - $450 = $300): -$300
- Adjusted list total = $29 150 - $350 + $400 - $300 = $28 900.

Both methods give $28 900.

[1 mark] B is correct. Adjusts control account: $28 400 + $500 = $28 900. Options A, C, and D represent unadjusted figures or incorrect error direction.

1. Initial shares: $400 000 / $0.50 = 800 000 shares.
2. Bonus issue (1 for 4):
- Bonus shares issued = 800 000 / 4 = 200 000 shares.
- Nominal value = 200 000 \times $0.50 = $100 000.
- Funded from Share premium: $120 000 - $100 000 = $20 000 remaining.
- New share count = 800 000 + 200 000 = 1 000 000 shares.
3. **Rights issue (1 for 5 on 1 000 000 shares):**
- Rights shares issued = 1 000 000 / 5 = 200 000 shares.
- Nominal value added to share capital = 200 000 \times $0.50 = $100 000.
- Premium added = 200 000 \times ($0.80 - $0.50) = $60 000.
4. Final balances:
- Ordinary share capital = $400 000 + $100 000 + $100 000 = $600 000.
- Share premium = $20 000 + $60 000 = $80 000.

[1 mark] A is correct. Calculation of bonus issue reduces share premium by $100 000 and rights issue adds $100 000 to share capital and $60 000 to share premium.

Analyze the effect of correcting each error on profit:
- Draft profit: $74 600
- Error 1: Rent expense was undercast by $3 200 - $2 300 = $900. Correcting this increases expense, reducing profit by $900.
- Error 2: Sales returns should be debited to sales returns (reducing revenue). Crediting sales instead overstated revenue by $1 400 and omitted the return of $1 400. Correction requires debiting sales ($1 400) and debiting sales returns ($1 400), reducing profit by $2 800.
- Error 3: Discount allowed (expense of $450) was credited as income (discount received of $450). Correcting this requires debiting discount allowed ($450) and debiting discount received ($450), reducing profit by $900.

Corrected profit = $74 600 - $900 - $2 800 - $900 = $70 000.

[1 mark] A is correct. Net adjustment is -$4 600 (-$900 - $2 800 - $900).

Retained earnings calculation:
- Opening retained earnings = $185 000
- Add: Profit for the year = +$94 000
- Less: Interim dividend paid (500 000 \times $0.03) = -$15 000
- Less: Transfer to general reserve = -$25 000
- Proposed dividend: Not recognized as an expense or reduction in equity until approved (IAS 10).
- Revaluation of land: Credited to revaluation reserve, not retained earnings.

Closing retained earnings = $185 000 + $94 000 - $15 000 - $25 000 = $239 000.

[1 mark] B is correct. Excludes proposed dividend ($25 000) and land revaluation ($40 000).

1. Acid test ratio = (Current assets - Inventory) / Current liabilities = 1.10
2. Liquid assets = 1.10 \times $50 000 = $55 000
3. Liquid assets = Trade receivables + Cash and cash equivalents
$55 000 = Trade receivables + $15 000 \implies Trade receivables = $40 000
4. Trade receivables turnover (days) = (Trade receivables / Credit sales) \times 365
= ($40 000 / $365 000) \times 365 = 40 days.

[1 mark] B is correct. Calculation: ($40 000 / $365 000) * 365 = 40 days.

1. Direct material kg per unit:
- X: $16 / $4 = 4 kg
- Y: $24 / $4 = 6 kg
- Z: $12 / $4 = 3 kg

2. Contribution per unit:
- X: $50 - ($16 + $12 + $4) = $18
- Y: $70 - ($24 + $18 + $6) = $22
- Z: $60 - ($12 + $24 + $3) = $21

3. **Contribution per kg of limiting factor:**
- X: $18 / 4 kg = $4.50 per kg (Rank 2)
- Y: $22 / 6 kg = $3.67 per kg (Rank 3)
- Z: $21 / 3 kg = $7.00 per kg (Rank 1)

4. Optimal production schedule (9 000 kg available):
- Produce 800 units of Z: 800 \times 3 kg = 2 400 kg (6 600 kg remaining)
- Produce 1 200 units of X: 1 200 \times 4 kg = 4 800 kg (1 800 kg remaining)
- Produce units of Y with remaining kg: 1 800 kg / 6 kg = 300 units of Y.

Optimal plan: 1 200 units of X, 300 units of Y, 800 units of Z.

[1 mark] A is correct. Ranking based on contribution per kg of direct material: Z (1st), X (2nd), Y (3rd).

1. Contribution per unit = $40 - $24 = $16
2. Break-even volume = Fixed costs / Contribution per unit = $96 000 / $16 = 6 000 units
3. Target sales volume = (Fixed costs + Target profit) / Contribution per unit
= ($96 000 + $36 000) / $16 = $132 000 / $16 = 8 250 units
4. Margin of safety in units = Target sales volume - Break-even volume
= 8 250 - 6 000 = 2 250 units

(Alternatively: Target profit / Contribution per unit = $36 000 / $16 = 2 250 units).

[1 mark] A is correct. Target volume (8 250) - Break-even volume (6 000) = 2 250 units.

1. Predetermined overhead absorption rate (OAR) = Budgeted overheads / Budgeted hours
= $480 000 / 120 000 hours = $4.00 per direct labour hour.
2. Overheads absorbed = Actual hours \times OAR
= 115 000 hours \times $4.00 = $460 000.
3. Over/under-absorption = Overheads absorbed - Actual overheads incurred
= $460 000 - $472 000 = -$12 000 ($12 000 under-absorbed).

[1 mark] D is correct. Absorbed overheads ($460 000) minus incurred overheads ($472 000) = $12 000 under-absorbed.

To find the opening balance, consider the required correcting journal entries to the suspense account:

1. Cheque received debited to customer instead of credited: debits were $480 too high and credits were $480 too low. Correction: Credit customer $960, Debit Suspense $960.
2. Purchases journal overcast: debits were $650 too high. Correction: Credit Purchases $650, Debit Suspense $650.
3. Discount allowed of $120 credited to discount received: debits were short by $120 and credits were overstated by $120 (net credit excess of $240). Correction: Debit Discount Allowed $120, Debit Discount Received $120, Credit Suspense $240.

Net debit entries needed to clear the suspense account:
\(\text{Debit to suspense} = \$960 + \$650 - \$240 = \$1\,370\)

Therefore, the original opening balance must have been a credit balance of $1 370.

A is correct: $1 370 credit. Total debit corrections to suspense = $960 (receivable correction) + $650 (purchases correction) - $240 (discount correction) = $1 370 debit, which clears an opening credit balance of $1 370.

Step 1: Number of shares before bonus issue = \(\frac{\$600\,000}{\$0.50} = 1\,200\,000\) shares.

Step 2: Bonus issue (1 for 4) = \(\frac{1\,200\,000}{4} = 300\,000\) new shares.
Nominal value of bonus shares = \(300\,000 \times \$0.50 = \$150\,000\).
To preserve flexible revenue reserves, share premium is utilised first:
- Share premium used = $140 000 (reducing the share premium balance to $0).
- The remaining $10 000 is taken from retained earnings.

Step 3: Total shares in issue after bonus issue = \(1\,200\,000 + 300\,000 = 1\,500\,000\) shares.

Step 4: Rights issue (1 for 5) = \(\frac{1\,500\,000}{5} = 300\,000\) shares issued at $0.80.
Premium per share = \(\$0.80 - \$0.50 = \$0.30\).
Share premium created = \(300\,000 \times \$0.30 = \$90\,000\).

Closing share premium balance = \(\$0 + \$90\,000 = \$90\,000\).

B is correct: $90 000. $140 000 opening share premium was fully utilised in the 1-for-4 bonus issue (nominal value $150 000), leaving $0. The subsequent rights issue created 300 000 shares \(\times\) $0.30 premium = $90 000.

Calculate the contribution per unit for each product:
- Product X: \(\text{Variable cost} = \$15 + \$18 + \$3 = \$36\); \(\text{Contribution} = \$48 - \$36 = \$12\)
- Product Y: \(\text{Variable cost} = \$25 + \$12 + \$5 = \$42\); \(\text{Contribution} = \$65 - \$42 = \$23\)
- Product Z: \(\text{Variable cost} = \$10 + \$24 + \$4 = \$38\); \(\text{Contribution} = \$50 - \$38 = \$12\)

Calculate direct material quantity per unit:
- Product X: \(\frac{\$15}{\$5} = 3\text{ kg}\)
- Product Y: \(\frac{\$25}{\$5} = 5\text{ kg}\)
- Product Z: \(\frac{\$10}{\$5} = 2\text{ kg}\)

Calculate contribution per kg of limiting factor:
- Product X: \(\frac{\$12}{3\text{ kg}} = \$4.00\text{ per kg}\)
- Product Y: \(\frac{\$23}{5\text{ kg}} = \$4.60\text{ per kg}\)
- Product Z: \(\frac{\$12}{2\text{ kg}} = \$6.00\text{ per kg}\)

Ranking in descending order of contribution per kg: 1st = Z ($6.00), 2nd = Y ($4.60), 3rd = X ($4.00).

A is correct: Z, Y, X. Products are ranked by contribution per kg of limiting material: Z ($6.00/kg), Y ($4.60/kg), X ($4.00/kg).

Step 1: Calculate revised selling price and contribution per unit:
Revised selling price = \(\$40 \times (1 - 0.10) = \$36\).
Variable cost per unit = $24.
Revised unit contribution = \(\$36 - \$24 = \$12\).

Step 2: Calculate revised total fixed costs:
Revised fixed costs = \(\$192\,000 + \$16\,000 = \$208\,000\).

Step 3: Calculate required sales units for target profit:
\(\text{Required sales units} = \frac{\text{Fixed costs} + \text{Target profit}}{\text{Unit contribution}} = \frac{\$208\,000 + \$80\,000}{\$12} = \frac{\$288\,000}{\$12} = 24\,000\text{ units}\).

B is correct: 24 000 units. ($208 000 fixed costs + $80 000 target profit) / $12 revised contribution per unit = 24 000 units.

Step 1: Calculate depreciation for each year prior to disposal:
- Cost on 1 January 2023 = $50 000
- Depreciation for 2023 (20% of $50 000) = $10 000
- Carrying amount at 31 December 2023 = \(\$50\,000 - \$10\,000 = \$40\,000\)
- Depreciation for 2024 (20% of $40 000) = $8 000
- Carrying amount at 31 December 2024 = \(\$40\,000 - \$8\,000 = \$32\,000\)
- Depreciation for 2025: $0 (policy charges no depreciation in the year of disposal).

Step 2: Calculate profit or loss on disposal:
\(\text{Carrying amount at disposal} = \$32\,000\)
\(\text{Disposal proceeds (part-exchange allowance)} = \$28\,000\)
\(\text{Loss on disposal} = \$32\,000 - \$28\,000 = \$4\,000\text{ loss}\).

D is correct: $4 000 loss. Carrying amount at disposal = $50 000 - $10 000 (2023) - $8 000 (2024) = $32 000. Loss on disposal = $32 000 carrying amount - $28 000 allowance = $4 000 loss.

Step 1: Calculate Cost of sales:
\(\text{Cost of sales} = \text{Revenue} \times (1 - \text{Gross profit margin}) = \$600\,000 \times (1 - 0.20) = \$480\,000\).

Step 2: Calculate Average inventory and Closing inventory:
\(\text{Rate of inventory turnover} = \frac{\text{Cost of sales}}{\text{Average inventory}} = 8\text{ times}\)
\(\text{Average inventory} = \frac{\$480\,000}{8} = \$60\,000\).
Since \(\text{Average inventory} = \frac{\text{Opening inventory} + \text{Closing inventory}}{2}\):
\(\$60\,000 = \frac{\$50\,000 + \text{Closing inventory}}{2} \implies \text{Closing inventory} = \$70\,000\).

Step 3: Calculate Purchases:
\(\text{Cost of sales} = \text{Opening inventory} + \text{Purchases} - \text{Closing inventory}\)
\(\$480\,000 = \$50\,000 + \text{Purchases} - \$70\,000 \implies \text{Purchases} = \$500\,000\).

Step 4: Calculate Trade payables:
\(\text{Trade payables turnover (days)} = \frac{\text{Trade payables}}{\text{Credit purchases}} \times 365 = 73\text{ days}\)
\(\text{Trade payables} = \frac{73}{365} \times \$500\,000 = 0.20 \times \$500\,000 = \$100\,000\).

C is correct: $100 000. Cost of sales = $480 000; Average inventory = $60 000; Closing inventory = $70 000; Purchases = $500 000; Trade payables = (73 / 365) \(\times\) $500 000 = $100 000.

Workings:

1. Closing inventory:
$$\text{Cost} = \$46\,200 - (\$3\,400 - \$1\,900) = \$46\,200 - \$1\,500 = \$44\,700$$

2. Cost of sales:
$$\text{Opening inventory} (\$38\,600) + \text{Purchases} (\$275\,000) + \text{Carriage inwards} (\$4\,200) - \text{Closing inventory} (\$44\,700) = \$273\,100$$

3. Rent and rates:
$$\text{Prepayment} = \frac{3}{12} \times \$4\,800 = \$1\,200$$
$$\text{Expense} = \$28\,800 - \$1\,200 = \$27\,600$$

4. Wages and salaries:
$$\text{Expense} = \$64\,500 + \$3\,600 = \$68\,100$$

5. Depreciation:
- $\text{Buildings} = 2\% \times $250\,000 = $5\,000$
- $\text{Equipment} = 20\% \times ($90\,000 - $32\,000) = 20\% \times $58\,000 = $11\,600$

6. Irrecoverable debts & Allowance:
- $\text{Irrecoverable debt written off} = $2\,500$
- $\text{Adjusted trade receivables} = $58\,500 - $2\,500 = $56\,000$
- $\text{Required allowance} = 5\% \times $56\,000 = $2\,800$
- $\text{Increase in allowance} = $2\,800 - $2\,100 = $700$

7. **Finance costs (Debenture interest):**
$$\text{Total interest} = 8\% \times \$50\,000 = \$4\,000$$

---

### Brambleton Ltd
**Statement of Profit or Loss for the year ended 31 December 2025**

$$\begin{array}{lrr}
\hline
& \$ & \$ \hline
\text{Revenue} & & 540\,000 \text{Cost of sales:} & & \quad\text{Opening inventory} & 38\,600 & \quad\text{Purchases} & 275\,000 & \quad\text{Carriage inwards} & 4\,200 & \hline
& 317\,800 & \quad\text{Less: Closing inventory} & (44\,700) & (273\,100) \hline
\textbf{Gross profit} & & \mathbf{266\,900} \text{Operating expenses:} & & \quad\text{Carriage outwards} & 6\,800 & \quad\text{Rent and rates } (28\,800 - 1\,200) & 27\,600 & \quad\text{Wages and salaries } (64\,500 + 3\,600) & 68\,100 & \quad\text{Administrative expenses} & 18\,400 & \quad\text{Depreciation: Buildings} & 5\,000 & \quad\text{Depreciation: Equipment} & 11\,600 & \quad\text{Irrecoverable debts} & 2\,500 & \quad\text{Increase in allowance for irrecoverable debts} & 700 & (140\,700) \hline
\textbf{Profit from operations} & & \mathbf{126\,200} \text{Finance costs: Debenture interest } (2\,000 + 2\,000) & & (4\,000) \hline
\textbf{Profit for the year} & & \mathbf{122\,200} \hline
\end{array}$$

1 mark for each valid line item or working as specified:
- Revenue $$540\,000\$ [1]
- Opening inventory + Purchases + Carriage inwards [1]
- Closing inventory $$44\,700$ (with NRV adjustment) [1]
- Gross profit $$266\,900\$ (OFR) [1]
- Carriage outwards $$6\,800$ [1]
- Rent and rates $$27\,600\$ (adjusted for prepayment) [1]
- Wages and salaries $$68\,100$ (adjusted for accrual) [1]
- Administrative expenses $$18\,400\$ [1]
- Depreciation on buildings $$5\,000$ [1]
- Depreciation on equipment $$11\,600\$ [1]
- Irrecoverable debt $$2\,500$ written off [1]
- Increase in allowance for irrecoverable debts $$700\$ [1]
- Finance costs / debenture interest $$4\,000$ [1]
- Profit for the year $$122\,200$ (OFR) [1]

Total: 14 marks

Workings:

1. Ordinary Share Capital & Share Premium:
- Initial shares = $\frac{$200\,000}{$0.50} = 400\,000$ shares
- Rights issue (1 for 4) = $\frac{400\,000}{4} = 100\,000$ shares
- Share capital increase = $100\,000 \times $0.50 = $50\,000$
- Share premium increase = $100\,000 \times ($0.80 - $0.50) = $30\,000$
- Share premium balance before bonus issue = $$45\,000 + \$30\,000 = \$75\,000\$
- Shares before bonus issue = \$400\,000 + 100\,000 = 500\,000\$ shares
- Bonus issue (1 for 5) = \$\frac{500\,000}{5} = 100\,000\$ shares
- Share capital increase = \$100\,000 \times \$0.50 = \$50\,000\$
- Funded from share premium = $$50\,000$
- Final ordinary share capital = $$200\,000 + \$50\,000 + \$50\,000 = \$300\,000\$ (600 000 shares of \$0.50 each)
- Final share premium = $$75\,000 - $50\,000 = $25\,000$

2. General Reserve:
- Final balance = $$30\,000 + \$15\,000 = \$45\,000\$

3. **Dividends & Retained Earnings:**
- Total shares on 15 November 2025 = \$600\,000\$ shares
- Interim dividend paid = \$600\,000 \times \$0.02 = \$12\,000\$
- Retained earnings at 31 December 2025:
$$\text{Opening balance} \; (\$68\,000) + \text{Profit for the year} \; (\$54\,600) - \text{Interim dividend} \; (\$12\,000) - \text{Transfer to general reserve} \; (\$15\,000) = \$95\,600$$

4. **Debentures & Accrued Interest:**
- Debentures at 31 December 2025 = $$80\,000 + $20\,000 = $100\,000$
- Total debenture interest for the year:
- On $$80\,000\$ for full year = $$80\,000 \times 6\% = $4\,800$
- On $$20\,000\$ for 3 months (1 Oct – 31 Dec) = $$20\,000 \times 6\% \times \frac{3}{12} = $300$
- Total interest charge = $$4\,800 + \$300 = \$5\,100\$
- Accrued debenture interest = $$5\,100 - $3\,600 = $1\,500$

---

### **Kestrel Marine Ltd**
**Statement of Financial Position (Extract) at 31 December 2025**

$$\begin{array}{lrr}
\hline
\textbf{Equity} & \$ & \$ \\
\text{Ordinary share capital (\$0.50 ordinary shares)} & & 300\,000 \\
\text{Share premium} & & 25\,000 \\
\text{General reserve} & & 45\,000 \\
\text{Retained earnings} & & 95\,600 \\
\hline
\textbf{Total equity} & & \mathbf{465\,600} \\
\\
\textbf{Non-current liabilities} & & \\
\text{6\% Debentures (repayable 2032)} & & \mathbf{100\,000} \\
\\
\textbf{Current liabilities} & & \\
\text{Trade payables} & 41\,200 & \\
\text{Bank overdraft} & 8\,500 & \\
\text{Other payables / Accrued interest} & 1\,500 & \\
\hline
\textbf{Total current liabilities} & & \mathbf{51\,200} \\
\hline
\textbf{Total equity and liabilities} & & \mathbf{616\,800} \\
\hline
\end{array}$$

1 mark per item/working as indicated below (Total: 9 marks):

- Ordinary share capital: $300 000 [1]
- **Share premium:** $25 000 [1]
- General reserve: $45 000 [1]
- **Workings for Retained earnings:** Correct calculation of dividend ($12 000) and transfer to reserve [1]
- Retained earnings: $95 600 [1] (OFR from candidate's dividend and reserves)
- **Total equity subtotal:** $465 600 [1] (OFR, dependent on at least 3 equity components)
- Non-current liabilities (6% Debentures): $100 000 [1]
- **Current liabilities:** Total $51 200 (Trade payables $41 200 + Bank overdraft $8 500 + Accrued interest $1 500 (1 OFR for accrued interest)) [1]
- **Total equity and liabilities:** $616 800 [1] (OFR, correct arithmetic summation of candidate's subtotals)

Note: Accept 'Other payables' or 'Accrued debenture interest' for $1 500 within current liabilities.

Evaluation of Option 1: Rights issue of ordinary shares

Benefits:
- No mandatory fixed annual charges: Dividends are discretionary and paid only when profits and cash flows permit, reducing cash flow pressure during difficult trading periods.
- Permanent capital: Equity capital does not have to be repaid, eliminating the refinancing or redemption risk that exists after 8 years.
- Existing shareholders maintain proportionate ownership and voting power if they subscribe to their full entitlement.
- Keeps financial gearing at 0%, reducing overall financial risk and leaving borrowing capacity available for future capital projects.

Drawbacks:
- Shareholders who do not exercise their rights will suffer dilution of their voting power and share of future earnings.
- May reduce future Earnings Per Share (EPS) if the new warehouse facility does not immediately generate proportional increases in net earnings.
- Issue costs (administrative and documentation expenses) may be higher than issuing debt.

Evaluation of Option 2: 7.5% Debentures

Benefits:
- No dilution of voting power or equity ownership for existing shareholders.
- Fixed interest payments ($22 500 per annum) are tax-deductible expenses, reducing the effective cost of debt.
- If the return on the automated storage facility exceeds 7.5%, the excess profit directly enhances shareholder returns (positive financial leverage).

*Drawbacks:*
- Creates a legal obligation to pay $22 500 interest every year regardless of profitability or liquidity conditions.
- Increases financial risk and gearing ratio ($300 000 / ($680 000 + $300 000) = 30.6%), which could deter risk-averse investors.
- Requires a lump-sum principal repayment of $300 000 at the end of year 8, requiring planned cash accumulation.
- May require creating charges over company assets as security and impose restrictive loan covenants.

Recommendation:
Cranford Ltd should implement Option 2 (Debentures). Given that the company currently carries zero debt, a gearing ratio of 30.6% is manageable, and the fixed finance cost allows existing shareholders to retain complete control while benefiting from the full upside of the new automated facility without having to invest additional personal capital.

Option 1 (Rights Issue) — [Max 3 marks]:
- 1 mark for each valid benefit identified and explained (e.g. no fixed servicing cost / dividends discretionary; permanent capital with no repayment date; no loss of control if rights taken up; low/zero gearing).
- 1 mark for each valid drawback identified and explained (e.g. dilution if rights not exercised; possible reduction in EPS; higher issue/administrative costs).

Option 2 (7.5% Debentures) — [Max 3 marks]:
- 1 mark for each valid benefit identified and explained (e.g. ownership and voting rights preserved; interest is tax-deductible; potential to increase returns to equity holders via financial leverage).
- 1 mark for each valid drawback identified and explained (e.g. legally binding interest commitment of $22 500 p.a.; increases gearing/financial risk; redemption obligation of $300 000 in 8 years; potential security/covenants on assets).

Recommendation — [1 mark]:
- 1 mark for a clear, reasoned recommendation consistent with the candidate's evaluative arguments.

Note: Award maximum 6 marks if only one option is discussed. Total = 7 marks.

Tariq

Cash Book (Bank column)

$$\begin{array}{|l|l|r||l|l|r|}
\hline
\textbf{Date} & \textbf{Details} & \textbf{\$} & \textbf{Date} & \textbf{Details} & \textbf{\$} \\
\hline
\text{2025} & & & \text{2025} & & \\
\text{May 31} & \text{Balance b/d} & 3\,820 & \text{May 31} & \text{Rates (Standing order)} & 410 \\
\text{May 31} & \text{S. Miller (Credit transfer)} & 650 & \text{May 31} & \text{Bank charges} & 90 \\
\text{May 31} & \text{P. Patel (Error correction: \$850 - \$580)} & 270 & \text{May 31} & \text{J. Khan (Dishonoured cheque)} & 370 \\
& & & \text{May 31} & \text{Balance c/d} & 3\,870 \\
\hline
& & 4\,740 & & & 4\,740 \\
\hline
\text{June 1} & \text{Balance b/d} & 3\,870 & & & \\
\hline
\end{array}$$

Working for error correction:
Cheque to P. Patel was overstated in cash book payments by $850 - $580 = $270. Therefore, $270 must be debited to the cash book to correct the over-credit.

Marking Scheme:
* [1 mark] for S. Miller (credit transfer) $650 on debit side.
* **[1 mark]** for P. Patel (correction of over-recorded payment) $270 on debit side.
* [1 mark] for Rates / Standing order $410 on credit side.
* **[1 mark]** for Bank charges $90 AND J. Khan (dishonoured cheque) $370 on credit side (both required for 1 mark).
* **[1 mark]** for correct final balance c/d and balance b/d $3 870 on the debit side on 1 June 2025 (Own Figure Rule applies if mathematical calculation is correct following from candidate entries).

Tariq

Bank Reconciliation Statement as at 31 October 2025

$$\begin{array}{lrr}
\text{Balance as per updated cash book} & & 3\,840 \\
\text{Add: Unpresented cheques} & & 1\,620 \\
\hline
& & 5\,460 \\
\text{Less: Uncredited deposits (lodgements)} & (2\,190) & \\
\text{Less: Bank error (cheque incorrectly debited)} & (450) & (2\,640) \\
\hline
\textbf{Balance as per bank statement (in credit / positive)} & & \mathbf{2\,820} \\
\hline
\end{array}$$

Alternative layout starting from the bank statement balance:

$$\begin{array}{lrr}
\text{Balance as per bank statement} & & 2\,820 \\
\text{Add: Uncredited deposits} & 2\,190 & \\
\text{Add: Bank error (cheque incorrectly debited)} & 450 & 2\,640 \\
\hline
& & 5\,460 \\
\text{Less: Unpresented cheques} & & (1\,620) \\
\hline
\textbf{Balance as per updated cash book} & & \mathbf{3\,840} \\
\hline
\end{array}$$

Award marks as follows:
- [1] for correct opening balance as per updated cash book ($3 840) with correct label.
- [1] for unpresented cheques ($1 620) correctly added.
- [1] for uncredited deposits ($2 190) correctly deducted.
- [1] for bank error of $450 correctly deducted AND resulting in the final balance as per bank statement of $2 820 (OFR).

Note: Allow reverse format starting from bank statement to cash book balance.

Any two valid reasons from the following:
1. To identify errors in the cash book or on the bank statement.
2. To identify transactions appearing on the bank statement not yet recorded in the cash book (e.g., bank charges, standing orders, direct debits, credit transfers).
3. To account for timing differences (e.g., unpresented cheques, uncredited deposits/lodgements).
4. To determine the accurate bank balance for presentation in the statement of financial position.
5. To act as an internal control procedure to deter and detect fraud or misappropriation of funds.

Award 1 mark for each valid reason stated, up to a maximum of 2 marks.
- Identify errors in cash book / bank statement (1)
- Identify items omitted from the cash book / update the cash book (1)
- Explain timing differences / reconcile the two balances (1)
- Establish the correct bank figure for financial statements (1)
- Internal control / prevent or detect fraud (1)

Reasons why a business prepares a regular bank reconciliation statement include:

1. Identifying errors (1 mark):
It allows the business to detect errors made in the cash book (such as incorrect amounts, wrong sides, or duplicate entries) or errors made by the bank, ensuring that records can be promptly corrected (1 mark).

2. Updating the cash book for unrecorded transactions (1 mark):
It reveals items processed directly through the bank account that are not yet recorded in the cash book, such as bank charges, interest, direct debits, standing orders, and customer credit transfers, ensuring the ledger is complete and up to date (1 mark).

3. Preventing and detecting fraud (1 mark):
It serves as an essential internal control mechanism to deter and identify unauthorised withdrawals, cheque tampering, or unrecorded cash takings (1 mark).

4. Ascertaining the true bank balance for financial reporting (1 mark):
It verifies the actual cash and cash equivalents available, providing an accurate balance for the statement of financial position and aiding reliable working capital management (1 mark).

Award [1] mark for identifying a valid reason/benefit and [1] mark for developing/explaining the point.

Points may include:
- Identification of errors in the cash book or by the bank [1] so they can be investigated and corrected promptly [1]
- Identification of unrecorded items in the cash book (e.g. direct debits, standing orders, bank fees, credit transfers) [1] allowing the cash book balance to be brought up to date [1]
- Internal control / fraud prevention [1] reducing the risk of misappropriation of funds or identifying unauthorised transactions [1]
- Verifying the correct bank balance [1] to ensure accurate presentation in the statement of financial position / better cash flow management [1]

(Max 2 marks per developed reason, total maximum = 4 marks)

(a) Journal Entries

$$\begin{array}{|l|c|c|}
\hline
\textbf{Details} & \textbf{Debit (\$)} & \textbf{Credit (\$)} \\
\hline
\text{1. Suspense} & 270 & \\
\quad \text{Sales returns} & & 270 \\
\hline
\text{2. Office equipment repairs} & 520 & \\
\quad \text{Office equipment} & & 520 \\
\hline
\text{3. Suspense} & 270 & \\
\quad \text{Jamal} & & 270 \\
\hline
\text{4. Purchases} & 780 & \\
\quad \text{D. Lee} & & 780 \\
\hline
\end{array}$$

Workings:
* Error 1: Sales returns account was over-debited by $$630 - \$360 = \$270\$.
* Error 3: Jamal's personal account was under-credited by $$410 - $140 = $270$.

---

**(b) Statement of Revised Profit for the year ended 31 December 2025**

$$\begin{array}{|l|r|}
\hline
\textbf{Item} & \textbf{\$} \\
\hline
\text{Draft profit for the year} & 28\,400 \\
\text{Add: Overstatement of sales returns (Error 1)} & 270 \\
\hline
& 28\,670 \\
\text{Less: Office equipment repairs (Error 2)} & (520) \\
\text{Less: Unrecorded purchases (Error 4)} & (780) \\
\hline
\textbf{Revised profit for the year} & \mathbf{27\,370} \\
\hline
\end{array}$$

(Note: Error 3 affects only personal ledger and suspense account, having no effect on profit.)

(a) General Journal entries [4 marks]:
* 1 mark for Dr Suspense $270, Cr Sales returns $270
* 1 mark for Dr Office equipment repairs $520, Cr Office equipment $520
* 1 mark for Dr Suspense $270, Cr Jamal (or Trade receivables) $270
* 1 mark for Dr Purchases $780, Cr D. Lee (or Trade payables) $780

(Accept reasonable account titles like 'Repairs expense' or 'Trade receivables / Trade payables'.)

(b) Calculation of revised profit [3 marks]:
* 1 mark for Draft profit $28 400 + $270 (Sales returns)
* 1 mark for - $520 (Repairs) AND - $780 (Purchases)
* 1 mark for final correct revised profit of $27 370 (OFR applies if previous adjustments follow candidates' journal entries consistently)

### Analysis of Errors and Suspense Account Postings

1. Purchases returns journal error:
* Purchases returns is a credit item. It was debited with $740 instead of credited.
* To correct: Credit Purchases returns by $1 480 ($740 \times 2).
* Entry in suspense: **Debit Suspense $1 480**.

2. Payment to trade payable error:
* Cash book was credited with $520, but the debit entry in M. Patel's account was omitted.
* To correct: Debit Trade payables (M. Patel) $520.
* Entry in suspense: **Credit Suspense $520**.

3. **Commission receivable error:**
* Cash book debited $310, commission receivable credited with only $130 (understated by $180).
* To correct: Credit Commission receivable by $180 ($310 - $130).
* Entry in suspense: **Debit Suspense $180**.

---

### Suspense Account

$$\begin{array}{llr|llr}
\textbf{Details} & & \textbf{\$} & \textbf{Details} & & \textbf{\$} \\
\hline
\text{Purchases returns} & & 1\,480 & \textbf{Opening balance (difference)} & & \mathbf{1\,140} \\
\text{Commission receivable} & & 180 & \text{Trade payables (M. Patel)} & & 520 \\
\hline
\textbf{Total} & & \mathbf{1\,660} & \textbf{Total} & & \mathbf{1\,660} \\
\end{array}$$

$$\text{Opening balance} = \$1\,480 + \$180 - \$520 = \mathbf{\$1\,140\text{ Credit}}$$

[1 mark] for calculating the debit adjustments to suspense: $1 480 (purchases returns) and $180 (commission receivable).
[1 mark] for calculating the credit adjustment to suspense: $520 (trade payables).
[1 mark] for the final correct figure of $1 140 AND identifying it as a Credit balance.

Note: If the candidate calculates $1 140 without stating 'Credit' or states 'Debit', award max 2 marks.

Statement of revised profit for the year ended 31 December 2024:

Draft profit for the year: $42 650

Add:
- Office equipment wrongly charged to office expenses: $3 500
- Correction of error in rent receivable account ($850 \(\times\) 2): $1 700

Less:
- Sales day book overcast: ($1 200)
- Depreciation on office equipment ($3 500 \(\times\) 20%): ($700)
- Overvaluation of closing inventory: ($600)
- Motor vehicle repairs undercast ($420 - $240): ($180)

Revised profit for the year: $42 650 + $3 500 + $1 700 - $1 200 - $700 - $600 - $180 = $45 170

1 mark: Draft profit ($42 650) and sales overcast deduction ($1 200)
1 mark: Office expenses added back ($3 500) and depreciation charged ($700)
1 mark: Rent receivable correction ($1 700)
1 mark: Inventory overvaluation deduction ($600) and motor repairs under-debited deduction ($180)
1 mark: Correct final revised profit of $45 170 (OFR applies if previous adjustments follow logical direction)

(a) Break-even point in units

$$\text{Variable cost per unit} = \$18 + \$18 + \$4 = \$40$$
$$\text{Contribution per unit} = \text{Selling price} - \text{Variable cost} = \$64 - \$40 = \$24$$

$$\text{Break-even point in units} = \frac{\text{Total fixed costs}}{\text{Contribution per unit}} = \frac{\$180\,000}{\$24} = 7\,500\text{ units}$$

(b) Margin of safety as a percentage

$$\text{Margin of safety (units)} = 12\,000 - 7\,500 = 4\,500\text{ units}$$
$$\text{Margin of safety (\%)} = \left( \frac{4\,500}{12\,000} \right) \times 100 = 37.5\%$$ (or $37.50\%$)

**(c) Sales revenue required for target profit of $96 000**

$$\text{Required total contribution} = \text{Fixed costs} + \text{Target profit} = \$180\,000 + \$96\,000 = \$276\,000$$

$$\text{Required sales volume (units)} = \frac{\$276\,000}{\$24} = 11\,500\text{ units}$$
$$\text{Required sales revenue} = 11\,500\text{ units} \times \$64 = \$736\,000$$

*(Alternative approach using Contribution to Sales ratio)*:
$$\text{C/S ratio} = \frac{\$24}{\$64} = 0.375\text{ or } 37.5\%$$
$$\text{Required sales revenue} = \frac{\$276\,000}{0.375} = \$736\,000$$

(a) [2 marks]
- (1 mark) for calculating contribution per unit = $24 (or $64 - $40).
- (1 mark) for break-even point = 7 500 units.

**(b) [1 mark]**
- (1 mark) for margin of safety = 37.5% [Allow OFR from (a)].

**(c) [2 marks]**
- (1 mark) for required units (11 500 units) OR required total contribution ($276 000) OR C/S ratio (37.5% / 0.375).
- (1 mark) for required sales revenue = $736 000 [Allow OFR].

Valid limitations include:

1. Constant selling price: Assumes the selling price per unit does not change with output, ignoring price discounts needed to sell higher volumes.
2. Constant variable cost per unit: Assumes variable costs change in direct proportion to output, ignoring economies of scale (e.g. bulk purchase discounts) or diseconomies of scale (e.g. overtime pay).
3. Constant fixed costs: Assumes fixed costs are constant across all output levels, ignoring stepped fixed costs.
4. Production equals sales: Assumes all units produced are sold during the period, meaning inventory changes do not affect profit.
5. Cost classification: Assumes all costs can be clearly categorized into either fixed or variable costs, which is difficult in practice (e.g. semi-variable costs).
6. Constant sales mix: For multi-product firms, it assumes a fixed sales mix ratio, which rarely holds true in dynamic markets.

Award [1] mark for each valid point stated, up to a maximum of [3] marks.

- Assumes selling price per unit remains constant (at all output levels / regardless of sales volume) [1]
- Assumes variable cost per unit remains constant (ignores bulk discounts / overtime rates) [1]
- Assumes total fixed costs remain constant (ignores stepped fixed costs) [1]
- Assumes all production is sold / inventory levels remain unchanged [1]
- Assumes all costs can be strictly split into fixed and variable components [1]
- Assumes constant sales mix (for multi-product businesses) [1]
- Ignores non-financial / qualitative factors [1]
- Focuses on the short term / assumes a static operating environment [1]

(Max 3 marks)

### Step 1: Calculate current break-even point and margin of safety in units
$$\text{Current contribution per unit} = \$60 - \$36 = \$24$$
$$\text{Current break-even point} = \frac{\text{Fixed costs}}{\text{Contribution per unit}} = \frac{\$144\,000}{\$24} = 6\,000\text{ units}$$
$$\text{Current margin of safety} = 9\,000\text{ units} - 6\,000\text{ units} = 3\,000\text{ units}$$

### Step 2: Determine target break-even point for the upcoming year
To maintain a margin of safety of 3 000 units at a sales level of 9 000 units:
$$\text{Target break-even point} = 9\,000\text{ units} - 3\,000\text{ units} = 6\,000\text{ units}$$

### Step 3: Calculate revised costs
$$\text{Revised variable cost per unit} = \$36 \times 1.15 = \$41.40$$
$$\text{Revised fixed costs} = \$144\,000 + \$15\,600 = \$159\,600$$

### Step 4: Calculate required contribution per unit and revised selling price
$$\text{Required contribution per unit} = \frac{\text{Revised fixed costs}}{\text{Target break-even point}} = \frac{\$159\,600}{6\,000\text{ units}} = \$26.60$$
$$\text{Revised selling price per unit} = \text{Revised variable cost} + \text{Required contribution} = \$41.40 + \$26.60 = \$68.00$$

Award marks as follows:
- 1 mark for calculating current break-even point (6 000 units) / current margin of safety (3 000 units).
- 1 mark for calculating revised fixed costs ($159 600) and revised variable cost per unit ($41.40).
- 1 mark (OFR) for calculating the required unit contribution ($26.60).
- **1 mark (OFR)** for final revised selling price per unit of $68.00.

Note: Allow Own Figure Rule (OFR) throughout for arithmetic errors carried forward logically.

Step 1: Calculate contribution per unit

* Standard: $120 - ($32 + $36 + $12) = $120 - $80 = $40
* Deluxe: $180 - ($48 + $60 + $16) = $180 - $124 = $56
* Executive: $250 - ($64 + $96 + $26) = $250 - $186 = $64

**Step 2: Calculate direct labour hours per unit and contribution per labour hour**

* Direct labour rate = $12 per hour
* Standard: $36 / $12 = 3 hours per unit; Contribution per hour = $40 / 3 = $13.33
* Deluxe: $60 / $12 = 5 hours per unit; Contribution per hour = $56 / 5 = $11.20
* Executive: $96 / $12 = 8 hours per unit; Contribution per hour = $64 / 8 = $8.00

Step 3: Determine ranking

1st: Standard
2nd: Deluxe
3rd: Executive

Step 4: Determine optimum production schedule (4 300 hours available)

* Standard (500 units × 3 hrs) = 1 500 hours (Balance remaining: 4 300 - 1 500 = 2 800 hours)
* Deluxe (400 units × 5 hrs) = 2 000 hours (Balance remaining: 2 800 - 2 000 = 800 hours)
* Executive: 800 hours / 8 hrs = 100 units

Step 5: Statement of maximum budgeted profit for June 2026

$$\begin{array}{|l|r|r|}
\hline
\textbf{Product} & \textbf{Calculation} & \textbf{Contribution (\$)} \\
\hline
\text{Standard} & 500 \text{ units} \times \$40 & 20\,000 \\
\text{Deluxe} & 400 \text{ units} \times \$56 & 22\,400 \\
\text{Executive} & 100 \text{ units} \times \$64 & 6\,400 \\
\hline
\text{Total Contribution} & & 48\,800 \\
\text{Less: Fixed costs} & & (28\,000) \\
\hline
\textbf{Maximum Budgeted Profit} & & \mathbf{20\,800} \\
\hline
\end{array}$$

[1] for calculating contribution per unit for all three products (Standard $40, Deluxe $56, Executive $64).
[1] for calculating direct labour hours per unit (Standard 3 hrs, Deluxe 5 hrs, Executive 8 hrs).
[1] for contribution per limiting factor (Standard $13.33, Deluxe $11.20, Executive $8.00) and ranking (1st Standard, 2nd Deluxe, 3rd Executive).
[1] for hours allocated to Standard (1 500 hrs) and Deluxe (2 000 hrs).
[1] for calculating production quantity of Executive (100 units).
[1] for total contribution of each product ($20 000, $22 400, $6 400) (OFR).
[1] for total contribution of $48 800 (OFR).
[1] for deducting fixed costs of $28 000 to arrive at maximum profit of $20 800 (OFR).

Step 1: Calculate the revised unit selling price and contribution per unit
$$\text{Revised selling price} = \$45.00 \times (1 - 0.10) = \$40.50$$
$$\text{Variable cost per unit} = \$14.00 + \$11.00 + \$5.00 = \$30.00$$
$$\text{Revised contribution per unit} = \$40.50 - \$30.00 = \$10.50$$

Step 2: Calculate the revised sales volume and total contribution
$$\text{Revised sales volume} = 12\,000 \times 1.25 = 15\,000\text{ units}$$
$$\text{Revised total contribution} = 15\,000 \times \$10.50 = \$157\,500$$

Step 3: Calculate revised fixed costs and revised profit
$$\text{Revised fixed costs} = \$120\,000 + \$18\,000 = \$138\,000$$
$$\text{Revised profit} = \text{Revised total contribution} - \text{Revised fixed costs}$$
$$\text{Revised profit} = \$157\,500 - \$138\,000 = \$19\,500$$

[1] for calculating the revised contribution per unit of $$10.50\$ (or revised selling price of $$40.50$).
[1] for calculating revised total contribution of $$157\,500\$ (or revised volume of \$15\,000\$ units and revised fixed costs of $$138\,000$).
[1] for final revised profit of $$19\,500$ (OFR applies if valid steps carried forward).

Option 1 (In-house manufacture with premium material):
• Financial: Yields an estimated profit of $38 500, which is $4 300 lower than Option 2 due to the 25% material price premium.
• Non-financial (Advantages): Kielder Ltd maintains direct control over product quality and manufacturing standards; production schedules can be adapted flexibly; ensures direct workforce remains fully utilized, avoiding idle time or labor discontent.
• Non-financial (Disadvantages): Sourcing from an overseas supplier may introduce shipping delays, customs clearance issues, or foreign currency exchange risks.

Option 2 (Buy in from Crest Supplies):
• Financial: Delivers higher quarterly profit ($42 800 vs $38 500, an increase of $4 300).
• Financial (Risk): Requirement for advance payment poses liquidity and cash flow pressure on working capital, with financial loss if the supplier fails to deliver.
• Non-financial (Risks): Crest Supplies is newly established with no proven track record regarding quality consistency or delivery punctuality; poor quality or delayed delivery could damage Kielder Ltd's market reputation and customer goodwill; risk of future supplier price increases once Kielder Ltd becomes reliant on them.

Recommendation / Decision:
A clear, justified recommendation based on the points discussed (e.g. Choose Option 1 to protect quality standards and avoid cash flow risk from advance payments despite the $4 300 lower profit, OR choose Option 2 to maximize profit by $4 300 provided adequate quality samples and performance guarantees are secured from Crest Supplies).

Option 1: In-house production (Max 3 marks)
• 1 mark for calculating / commenting on financial impact (profit is $4 300 lower / higher unit material costs).
• 1 mark for quality control retained in-house / protecting brand reputation.
• 1 mark for workforce utilization / avoiding idle capacity or redundancy.
• 1 mark for potential risks of overseas supplier (shipping lead times / foreign exchange risk).

Option 2: Buy from Crest Supplies (Max 3 marks)
• 1 mark for financial benefit of higher profit ($42 800 vs $38 500).
• 1 mark for liquidity / cash flow risk arising from paying in advance.
• 1 mark for reliability / track record risk of a newly established subcontractor.
• 1 mark for customer goodwill risk if delivery deadlines or quality standards fail.

Recommendation (1 mark)
• 1 mark for a clear, reasoned recommendation consistent with candidate arguments.

Total: 7 marks