ANSWERS NOT TO BE SEEN BY STUDENTS

QN 1.
1. Identify Contribution Margin ratio (5 marks)
2. Analyse Break-even Point’ in Units and (5 marks)
3. Calculate the numbers of units to be sold and (10 marks)
4. Reflect on the sales in dollars necessary to achieve the target profit. (5 marks)
Solution
1. Contribution Margin (CM) in % = Sales – Variable expenses / Sales
CM = 200-60/200 = 70%

Contribution Margin (CM) in Units = Selling price per Unit – Variable cost per unit
CM in Units = 200 – 60 = 140 units

2. Break Even Point (BEP) in Unit = Fixed expenses + Operating Income / contribution
margin per unit
BEP in Unit = 5000 + 6000/ 140 = 79 Units

3. Units to be sold for achieving Target Profit of 7000

Additional Units to be sold = Target Profit / CM per Unit

= 7000 / 140 = 50 Units
Total No. of Units to be produced for achieving the targeted profit= BEP +Additional
units to be sold
Total no of units to be produced = 79+50 = 129 Units

4. Sales in Dollars = Total no of units to be produced x Sales price per Unit

Sales in Dollars = 129 units x $200 = $ 25,800
QN 2. (25
marks)
Solution
1. IRR
PV factor of I = Cash Outlay/ Average cash inflows
Average cash Inflows = (200+300+400+500+500)/5
ACF= 1900/5=380
Therefore,
PV factor of I = 1500/380=3.947
The project seems to be financially viable, but IRR is still to be investigated
Locating the Present value factor of investment outlay (I) on the annuity table across the line
of 5 years (since the cash flows for 5 years are given) the closest PV factor to the above
factor of 3.947 and the corresponding discount rate in the relevant columns are

PVF Discount rate

3.993 8%
3.890 9%
By using the interpolation technique
IRR = D1+(C1-I /C1-C2)*(D2-D1)
IRR= 8 + (3.993-3.947/3.993-3.890) *(9-8)
IRR= 8 +(0.046/0.103) *1
IRR= 8 + 0.446
IRR= 8.44 %

2. Analysis: Since IRR < the discount rate, therefore, the Decision is to reject the project.
The present discount rate is 12%, which is higher than the IRR of 8.44% that the project
promises to deliver. Therefore, it is very clear that the company should not invest in such a
project.

Marks distribution:
1. Appropriate calculation of IRR = 20 marks
2. Analysis of the IRR and appropriate suggestion = 5 marks
3. TOTAL = 25 marks
QN 3.
1. EOQ= √ 2 DC / H
EOQ = √ 2∗5000∗600 /10 = 775 Units
2. How many times in a year?
= Consumption during a Year / EOQ
= 5000/775 = 6.5 or 7 times
3. Students answer may vary. This question assesses students’ understanding of ratio
analysis and working capital management policies
Marks distribution:
Level of interpretation and evaluation Marks
Excellent 21 - 25
Very good 16 - 20
Good 11 - 15
Satisfactory 06 - 10
Poor 01 - 05

QN 4.
A. Calculate the return on equity and return on capital employed. Discuss are they
sufficient from the investors point of view? Justify your statement with the help of valid
arguments. (10 marks)
Performance Ratios
Return on Equity Ratio = PAT/Equity Shareholder Fund
ROE = 210/750*100 = 28%
Return on Capital Employed Ratio = EBIT/ESF +LTB
ROCE= 328/(750+150) *100 = 328/900 *100 = 36.44
Marks distribution:
1. Identifying the Return on equity = 4 marks
2. Calculating Return on capital employed = 4 marks
3. Analyzing the sufficiency and its suitability for investors = 5 marks
4. Appropriate conclusion with valid justifications = 2marks
5. TOTAL = 15 marks

B. . Students answer may vary. This question assesses students’ understanding of

Financial statements and Reporting.
(15 marks)
Marks distribution:
 Level of interpretation and evaluation Marks
Excellent 21 - 25
Very good 16 - 20
Good 11 - 15
Satisfactory 06 - 10
Poor 01 - 05

QN5
A. . Students answer may vary. This question assesses students’ understanding of
Financial statements and Reporting.
(10 marks)
Marks distribution:
Level of interpretation and evaluation Marks
Excellent 21 - 25
Very good 16 - 20
Good 11 - 15
Satisfactory 06 - 10
Poor 01 - 05

B. Students’ answers may vary. This question assesses students’ understanding of

working capital management.
(15 marks)
Marks distribution:
Level of interpretation and evaluation Marks
Excellent 21 - 25
Very good 16 - 20
Good 11 - 15
Satisfactory 06 - 10
Poor 01 - 05