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Dear Sir,
Part (a) of the fifth question for the June 2013 exam is giving me some problems. I saw your suggested answers, by open tuition for the June 2013 exam, and I have a few clarifications that I need:
we are told in note 3: ” These costs must be paid in full before the end of the year ending 31 May 2014.” Is this a typing error, should it be “year ending 31 May 2013”. Because in your answers (and even in the examiner’s marking scheme) there is no adjustment for the 6% inflation to the cost of 125,500. Why is this the case?
Regarding note 2 and the labour increment of 2% effective from Dec 2013, then after getting the 599,940 figure, why don’t we gross up this figure with the rate of inflation of 2% further given before the notes?
Please explain the above two issues:
Thanks.
Note 3:
There is no typing error.
The question says that “there is a 70% chance that the cost WILL BE $145,000……..”
This means that we have already estimated what we will pay next year. (It is not going to be what we paid this year together with inflation – it is our estimate of what we actually expect to pay)Note 2:
If you look at the workings for the 599,940, you will see that 2% has already been added on (by multiplying by 1.02) and so we do not want to add it on again!!
(It is only added on to half the labour cost because the 2% pay rise will only occur half way through the year.)Incidentally, it is not inflation – it is a pay rise (the inflation rate may be completely different!)
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