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April 2016 Q20(part 1)

Discussion in 'CB1' started by Shiksha, Feb 19, 2019.

  1. Shiksha

    Shiksha Member

    Hi,
    I wanted to clarify if there was an error in the answer to question 20(part 1) when calculating the ROCE. Shouldn't the ROCE be calculated as Profit before interest and tax divided by equity plus long-term debt?
    Hence, in the particular question, shouldn't ROCE for say, pensions be calculated as (2205+288)/(3861+1600) ?
    I have attached the April 2016 paper for your reference.
    Thanks,
    Shiksha
     

    Attached Files:

    Shiksha, Feb 19, 2019
    #1
  2. Lynn Birchall

    Lynn Birchall ActEd Tutor Staff Member

    Hi Shiksha

    Good question! I certainly agree with your definition of ROCE and the ASET solution does the calculation you describe, eg ROCE for pensions is calculated as (2205+288)/(3861+1600). Doing this would be correct and get the marks.

    In this particular sitting, it seems the examiners were relaxed about making the interest rate adjustment (ie adding the interest back in) and so doing the pensions ROCE as 2205 / (3861+1600) was also considered correct on this occasion.

    For future questions, I'd recommend doing what you describe in your post (ie being careful to achieve consistency between numerator and denominator) in case the examiners give only the strictly correct/consistent approach credit.

    Best wishes
    Lynn
     
    Lynn Birchall, Feb 19, 2019
    #2
  3. AKS01

    AKS01 Very Active Member

    Hi,

    On the same question, I am a bit confused on how they have calculated the Gross Profit Margin Ratio. In ASET they have calculated the Gross Profit as Gross Profit = 11000-7700. Should we not be deducting the depreciation charges as well?

    Thanks
     
    Last edited: Apr 1, 2019
    AKS01, Apr 1, 2019
    #3
  4. Lynn Birchall

    Lynn Birchall ActEd Tutor Staff Member

    Hi

    The issue is essentially what's a 'direct cost' in this case isn't it (as it's direct costs that are deducted to get gross profit)? The question does say:
    'Staff time is the only expense which is charged directly to contracts. All other expenses are treated as overheads.'
    which I suspect is why the solution deducts only salaries to get to Gross Profit.
    Bear in mind that this is a consultancy business, so the treatment of depreciation of premises might be different from the depreciation of factory/machinery we see in most past exam questions.

    Lynn
     
    Lynn Birchall, Apr 1, 2019
    #4

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