Case study july 2013 exam paper ICAEW

Wednesday 24 July 2013 (4 hours) CASE STUDY CANDIDATE NUMBER DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO When instructed: a b check that your question paper contains all the required pages The Institute’s consecutive page numbering may be found under the base line at the foot of each page; enter your candidate number in the box provided above Number each page of your answer consecutively using the space provided at the top right of each sheet Ensure that your candidate number is written on each page of your answer After the instruction to stop writing at the end of the paper, you will be given five minutes to assemble your answer in this folder Fasten your complete script inside this folder using the hole in the back page and the tag provided Do not include your question paper in the folder Answer folders and examination stationery, used or unused, must not be removed from the Examination Hall Question papers may, however, be retained by candidates Your answer must be submitted on the paper provided by the ICAEW in the Examination Hall Any pre-prepared papers, or papers comprising annotated exhibits from the case material, included in your answer WILL NOT be marked by the examiners ICAEW USE ONLY Copyright © ICAEW 2013 All rights reserved 171062 BLANK PAGE List of exhibits The following exhibits were included in the material provided as Advance Information: About you (Phil Roberts) and your employer (Palate Ltd) The UK contract catering industry: Background Contract catering: The business model Palate Ltd: Overview of the business Email dated 19 July 2012 from Samantha James to all Palate directors Palate Ltd: Management accounts for the year ended 31 May 2012 Palate Ltd: Overview of business units (July 2012) Palate Ltd: Example client contracts (summary of key terms) The food service supply chain 10 Palate Ltd: The way forward (the board’s strategic overview, May 2013) 11 Letter dated June 2013 from Morgan Catering Advisors to Palate Ltd and to Arno Girls’ Boarding School, together with a note from Oswald King to Samantha James 12 Press articles The following items are newly provided: 13 Email dated 24 July 2013 from Samantha James to you 14 Palate Ltd: Draft management accounts for the year ended 31 May 2013 15 Email dated 11 July 2013 from Nasir Khan to Samantha James 16 Email dated 23 July 2013 from Oswald King to Samantha James 17 Article dated 23 July 2013 from Catering Now 18 Email dated 22 July 2013 from George Watson to Samantha James 19 Letter dated 17 July 2013 from Ogilvie Catering Consultants to Palate Ltd and to Humbells Hardware ICAEW/CS/J13 of 15 BLANK PAGE ICAEW/CS/J13 of 15 PALATE LTD: CASE STUDY REQUIREMENT You are Phil Roberts, a final-year trainee ICAEW Chartered Accountant working for Palate Ltd, a contract catering company based in St Albans, just outside London Palate has three business units, each operated as a separate division, though they form a single statutory entity You report to the Director of Finance and Business Development, Samantha James Requirement You are required to prepare a draft report for the Palate board, as set out in the email dated 24 July 2013 from Samantha James to you (Exhibit 13) Your report should comprise the following four elements:   An executive summary Your responses to the three detailed requirements set out in Exhibit 13, including financial appendices (as required) State clearly any assumptions that you make All workings should be attached to your answer Your report should be balanced across the three detailed requirements, and the following time allocation is suggested: Reading and planning Performing calculations and financial analysis Drafting report hour hour hours Marks allocation All of the marks in the Case Study are awarded for the demonstration of professional skills, allocated broadly as follows: Applied to the four elements of your report (as described above)  Assimilating and using information  Structuring problems and solutions  Applying judgement  Drawing conclusions and making recommendations Applied to your report as a whole  Demonstrating integrative and multidisciplinary skills  Presenting appropriate appendices 20% 25% 25% 20% 90% 5% 5% 100% Of the total marks available, 15% are awarded for the executive summary and approximately 10% for the relevant discussion of ethical issues within your answer to the requirements In planning your report, you should be aware that not attempting one of the requirements will have a significantly detrimental effect on your chances of success, as will not submitting an executive summary In addition, as indicated above, all four skills areas will be assessed under each of the four elements of your report Accordingly, not demonstrating your judgement and failing to include appropriate conclusions and/or recommendations in each element of your report will affect your chances of success ICAEW/CS/J13 of 15 BLANK PAGE ICAEW/CS/J13 of 15 EXHIBIT 13 EMAIL From: To: Date: Subject: Samantha James Phil Roberts 24 July 2013 Client issues A number of significant issues and opportunities have arisen recently in relation to each of our three business units, and these need to be addressed as a matter of urgency I attach the following relevant documents:       Palate’s draft management accounts for the year ended 31 May 2013 (Exhibit 14) Email from Nasir Khan: TN business unit / HLSF (Exhibit 15) Email from Oswald King: New business opportunity (Exhibit 16) Article from Catering Now (Exhibit 17) Email from George Watson: Humbells Hardware (HH) (Exhibit 18) Letter from Ogilvie Catering Consultants to Palate and Humbells Hardware (Exhibit 19) I would like you to prepare a draft report to the board, in which you should: Review the results of TopNotch (TN) business unit, and the results of our client Hertfordshire Late Spring Fair (HLSF), for the year ended 31 May 2013 You should compare TN’s revenue, cost of sales and gross profit (Exhibit 14) with those for the year ended 31 May 2012, having first adjusted the draft 2013 management accounts to exclude the results of both HLSF 2012, held in June 2012, and HLSF 2013, held in May 2013 (see Exhibit 15) You should refer as necessary to the analysis in Note of the accounts You should then review the results of the HLSF 2013 event by comparison with both the HLSF 2012 and HLSF 2011 events Evaluate whether Palate should tender for the Vynes Independent School (VIS) contract, as requested in Oswald King’s email dated 23 July 2013 (Exhibit 16) Your evaluation should comprise a calculation of Palate’s minimum revenue and gross profit to be earned in each of the first three years of the VIS contract, based on the assumptions and estimates set out in Exhibit 16, together with an assessment of these assumptions and estimates and of the practical considerations associated with the contract Discuss the steps that we need to take to address the issues raised in the letter from Ogilvie Catering Consultants (Exhibit 19), as referred to in George Watson’s email (Exhibit 18) Your discussion should be set in the context of both our desire to maintain a strong and profitable relationship with HH and our recent strategic review (Exhibit 10) Where appropriate, please also identify any wider implications for Palate as a whole and any ethical concerns that arise for Palate I look forward to reading your draft report ICAEW/CS/J13 of 15 BLANK PAGE ICAEW/CS/J13 of 15 EXHIBIT 14 Palate Ltd: Draft management accounts for the year ended 31 May 2013 INCOME STATEMENT Notes Revenue Cost of sales Food and consumables Wage costs Location fees Transport costs Gross profit Administrative expenses Operating profit Net interest Profit before tax Corporation tax Profit for the year 1 XX £000 9,464 TN £000 6,633 LA £000 4,984 Total £000 21,081 (4,723) (3,431) (99) 1,211 (2,691) (2,508) (210) (106) 1,118 (2,356) (2,133) (73) 422 (9,770) (8,072) (210) (278) 2,751 (1,935) 816 27 843 (211) 632 STATEMENT OF FINANCIAL POSITION £000 ASSETS Non-current assets Property, plant and equipment Current assets Inventories Receivables Cash and cash equivalents 51 648 2,057 1,688 4,393 Total assets 4,444 EQUITY & LIABILITIES Equity Ordinary share capital Retained earnings 10 2,077 Total equity Current liabilities 2,087 2,357 Total equity & liabilities 4,444 STATEMENT OF CASH FLOWS (summary) £000 Net cash from operating activities Net cash used in investing activities Cash flows from financing activities – dividends paid 135 (10) (300) Net change in cash and cash equivalents Cash and cash equivalents at beginning of year (175) 1,863 Cash and cash equivalents at end of year 1,688 ICAEW/CS/J13 of 15 NOTES TO THE MANAGEMENT ACCOUNTS Supplementary information – results from key clients Revenue £000 XX Humbells Hardware Ross Laboratories Greatwell Other TN V Park (see note) TG Music Festival (see note) Hall Golf Club Other LA AGBS Clarkstone Devaney’s Other Gross profit £000 3,811 2,267 1,384 2,002 9,464 370 325 161 355 1,211 1,202 1,583 1,141 2,707 6,633 157 249 222 490 1,118 1,095 1,163 926 1,800 4,984 96 125 80 121 422 Note: Visitor numbers were as follows: V Park TG Music Festival 158,000 437,000 Administrative expenses £000 Wages & salaries, pensions and other costs Property costs Staff training, welfare & recruitment Insurance Repairs & maintenance Marketing & promotions Depreciation Telephone, printing & ICT Motor and travel expenses Bank charges ICAEW/CS/J13 1,352 148 57 86 49 58 63 57 38 27 1,935 of 15 Receivables £000 Trade receivables Other receivables and prepayments 1,880 177 2,057 Current liabilities £000 Trade payables Accruals and deferred income Corporation tax Other current liabilities 1,463 241 211 442 2,357 Employee numbers The average number of employees (full-time equivalents) during the year was as follows: Catering Administration ICAEW/CS/J13 503 45 548 of 15 BLANK PAGE ICAEW/CS/J13 10 of 15 EXHIBIT 15 EMAIL From: To: Date: Subject: Nasir Khan Samantha James 11 July 2013 TN business unit / HLSF Although the management accounts appear to show a good result for TN, I am concerned that this is distorted by the timing of the Hertfordshire Late Spring Fair (HLSF) – one of our most prestigious clients – as all revenue and costs from both the “HLSF 2012” and “HLSF 2013” events are recognised in the 2013 accounts HLSF had always been held over the traditional UK three-day public holiday weekend in late May However, the organisers (local authority) scheduled the 2012 event for early June to coincide with the Queen’s Diamond Jubilee celebrations in the UK and it took place over four days (Saturday – Tuesday June 2012), with longer opening hours than usual As had always been the case, our location fee was payable to the local authority on the first day of the event This year, HLSF reverted to its regular slot, being held on Saturday 25 – Monday 27 May 2013 Less than a month before the event, the local authority announced its decision to double its admission prices, mistakenly believing that they had been too low in the past Total HLSF visitor numbers dropped to 58,000, compared with 115,000 in 2012 and 74,000 in 2011 In addition, with a forecast of unseasonally cold weather, we added more hot food to the menu, which entailed more staff and the hire of extra mobile kitchen equipment The weather was in fact fine, so the demand for hot food was lower than expected A summary of the last three events is set out below Prior to 2012, Palate had always consistently achieved revenue of between £300,000 and £350,000 on HLSF at a gross margin of around 25% Revenue Cost of sales Food and consumables Wage costs Location fees Transport costs Gross profit ICAEW/CS/J13 HLSF 2013 £000 284 HLSF 2012 £000 530 (153) (81) (15) (10) 25 (234) (97) (30) (16) 153 11 of 15 HLSF 2011 £000 312 (149) (65) (15) (7) 76 EXHIBIT 16 EMAIL From: To: Date: Subject: Oswald King Samantha James 23 July 2013 New business opportunity Please find attached (Exhibit 17) an article posted this morning on the Catering Now website We need to evaluate whether to tender for the VIS contract by calculating Palate’s minimum revenue and gross profit for an initial three-year period, based on the assumptions and estimates set out below, and assessing the related practical considerations This is especially important since the contract would take effect on September 2013, only just over a month from now Our competitor Ravenous has already announced its intention to tender for this contract My initial discussions with VIS have revealed the following VIS would be required to guarantee in the contract a minimum number of meals for each of the three years, based on agreed estimates of pupil and staff numbers, average take-up of meals and the standard 190 days in a school year The figures below are VIS’s current best estimates for these Specifically, take-up is less than 100% to reflect VIS’s proposed “liberal” ethos, entitling pupils to leave the premises at lunchtime as long as they sign out It also allows for pupil and staff absences for other reasons (notably illness and exam study leave) Take-up is assumed to build to a peak in Year as satisfaction levels and the popularity of the meals served by Palate increase Our tender would be based on this guaranteed minimum number of meals and an agreed average revenue per meal for each year payable by VIS to Palate The £ figures below are my initial estimates of this average revenue, based on our experience at other schools VIS would pay Palate one-third of the total annual minimum guaranteed revenue at the start of each school term (ie, on September, January and May) VIS would have to give a full term’s notice to Palate if it wished to reduce the minimum numbers of meals for the following term Pupil numbers Staff numbers Year Year Year (beginning (beginning (beginning Sept 2013) Sept 2014) Sept 2015) 400 800 1,200 50 100 150 450 900 1,350 Average take-up of meals 60% 75% 90% Average revenue per meal (£) 2.50 2.75 2.75 I would anticipate a gross margin of 5% in Year 1, rising to 10% in Year and 15% in Year As well as reflecting likely economies of scale as the volume expands, this assumes that:    food costs will remain relatively stable, with no large inflationary increases or shortages in any key ingredients; menus will not alter significantly from year to year; and the ratio of catering staff to meals served, and the number of staffing hours per day, will be in line with those normally provided for our school clients ICAEW/CS/J13 12 of 15 EXHIBIT 17 Panic as caterer goes out of business (Catering Now, 23 July 2013) The brand-new Vynes Independent School (VIS), which is due to welcome its first group of pupils on September 2013, is in crisis Jordi, the company that was to be the exclusive provider of catering services to VIS, has gone into administration and will no longer be in a position to fulfil its contract Jordi owes money to HMRC as well as a number of suppliers and many of its employees Industry sources believe that the company lost control of its working capital cycle “Emergency” tender In view of Jordi’s failure, VIS is now expected to go through an “emergency” tender process to identify a replacement caterer able to start straightaway Needless to say, the company chosen will – among other qualitative and quantitative criteria – have to be able to demonstrate its financial stability before being accepted The original appointment of Jordi was somewhat controversial: no competitive tender took place at the time and Jordi’s CEO, Reg Ironton, is also one of VIS’s founders VIS will open as a day school in September 2013 with 400 pupils at new, purpose-built premises Another 400 pupils are expected to join in September 2014 and then a further 400 in September 2015, resulting in a 100% complement of 1,200 by that date Staff numbers (teaching and other) will be 50 at the outset and would then be expected to expand in proportion to pupil numbers The successful bidder will therefore find itself with a contract initially small in size but growing into a substantial one over time This is seen as an attractive proposition since the caterer can gauge VIS’s needs while it is still growing, making changes as necessary and increasing its efficiency before VIS reaches full capacity State-of-the-art Jordi was to provide a full service, based on its “signature” meals – and made from local, fresh produce, seasonally chosen and sustainably sourced The new caterer will equally be expected to offer a menu well matched with VIS’s vision and ethos, consisting of innovative, high-quality and nutritious food (both hot and cold) – and value for money The new premises comprise state-of-the-art facilities, including language learning zones, music and theatre studios, an art and design wing, a food technology room, plus indoor and outdoor sports venues (Some of these could in due course be hired out for conferences and other external events, but we understand that there are no immediate plans for such activities.) Pertinently, they also boast a dining area with capacity for 600 people eating together, as well as two fully-fitted kitchens, enabling the chosen caterer to prepare all meals on-site The system created by Jordi was designed to allow pupils and staff to select their menu choice from a handheld device at any time between 07.00 and 09:00 on the same day, which in turn enables the kitchen staff to plan more accurately and minimise wastage Tendering companies will need to be aware that there is a well-known fast food outlet and a popular sandwich shop around five minutes’ walk away, both with a thriving lunchtime business However, experts say that the VIS contract will attract bidders because it could generate revenue of up to £650,000 per year once there is a 100% complement of pupils ICAEW/CS/J13 13 of 15 EXHIBIT 18 EMAIL From: To: Date: Subject: George Watson Samantha James 22 July 2013 Humbells Hardware (HH) Please see attached (Exhibit 19) the letter from Ogilvie Catering Consultants, which needs to be read in the context of:   HH’s ongoing cost-cutting programme, which resulted in 200 job losses at its head office with effect from November 2012 and is now being extended to other areas of its business, including outsourced activities such as catering HH’s proposal to convert part of one superstore into a customer restaurant on December 2013 (and to the same at all its other superstores if the first one is a success), which HH believes to be a more efficient use of space The provision of catering to customer restaurants would form an extension to our existing contract I understand from our on-site catering team at HH that Ogilvie was put under pressure by HH’s directors to write a negative report as they want to renegotiate the contract on more favourable terms In particular, they want to be able to challenge the costs that we pass on to them While I appreciate HH’s situation, a balance has to be struck between cost and quality, and in general we need to understand the basis for Ogilvie’s observations Specifically, after receiving the letter, I took some of our catering staff working at other clients and redeployed them as “mystery diners” at HH head office to give us their views on the quality of the food being served, and these have contradicted the comments about temperature at Ogilvie’s issue 1(ii) I have spoken to Manuel Hablo about issue His cousin is managing director of a large exporter of agricultural produce from Spain to the UK, so he (Manuel) can obtain preferential terms for certain fruits I reminded him about Project Greenbuy and our purchasing policy He said that the policy was short-sighted of Palate, given HH’s proximity to Luton Airport and hence its ready access to overseas suppliers with lower-cost food, often of equal quality and in season We need to address the issues raised by Ogilvie in the context of both our desire to maintain a strong, profitable relationship with HH and our recent strategic review (Exhibit 10) Where appropriate, we also need to identify any wider implications for Palate as a whole and any ethical concerns that arise for Palate ICAEW/CS/J13 14 of 15 EXHIBIT 19 TO: Palate Ltd Yeats Avenue St Albans HERTFORDSHIRE TO: Humbells Hardware 15-19 Rotham Street Luton BEDFORDSHIRE FROM: Ogilvie Catering Consultants 11 Rowse Lane LONDON SE7 17 July 2013 Review of catering operations at Humbells Hardware (HH) head office Under the terms of the contract (Exhibit 8) dated September 2011 between Palate and HH, we reviewed the catering operations at HH’s head office for a period of five days in July 2013, based on our own observations as well as conversations with HH diners and Palate staff The following issues arose The volume of wastage (10%) was unacceptably high, in terms of both (i) food inventory that is not used and has to be discarded and (ii) uneaten food left on plates  Problem (i) relates both to cooked food that is unsold and unprocessed food that has passed its “use by” date It arises because there are too many menu choices  Problem (ii) is due mainly to poor-quality kitchen equipment (all owned by HH), meaning for example that some food is not reheated to the required temperature Palate’s food labelling and menus (especially in respect of allergens such as nuts and dairy products) were found in some cases to be unclear, with the risk that people with special dietary requirements for medical reasons could have their health endangered On one day of our visit, there was a cancelled delivery by Oldham Farms (Palate’s beef supplier) Diners requesting a particular meat dish found that it had been replaced by clearly lower-grade imported meat from a local wholesaler (not a current Palate supplier) that appears to lack proper procedures for tracing the source of its imports The sustainability targets set under the terms of the contract are unlikely to be met:   Energy saving: during our visit, equipment was often left running when not in use If this continues, electricity consumption will reduce by only 2% in the current year Food miles: on some occasions during our visit, lorries delivered only a few items at a time, suggesting that the 25% reduction may not be achieved Manuel Hablo (Palate’s new chef at HH’s head office) mentioned to one of our team that he is proposing to source fruits from abroad, which will help to keep costs down although it is against current Palate policy We propose a meeting between the parties to resolve these matters Yours faithfully, Ogilvie Catering Consultants ICAEW/CS/J13 15 of 15 ... 23 July 2013 from Oswald King to Samantha James 17 Article dated 23 July 2013 from Catering Now 18 Email dated 22 July 2013 from George Watson to Samantha James 19 Letter dated 17 July 2013 from... 24 July 2013 from Samantha James to you 14 Palate Ltd: Draft management accounts for the year ended 31 May 2013 15 Email dated 11 July 2013 from Nasir Khan to Samantha James 16 Email dated 23 July. .. Palate Ltd and to Humbells Hardware ICAEW/ CS/J13 of 15 BLANK PAGE ICAEW/ CS/J13 of 15 PALATE LTD: CASE STUDY REQUIREMENT You are Phil Roberts, a final-year trainee ICAEW Chartered Accountant working