Case study july 2012 marks plan ICAEW

EXAMINERS’ COMMENTS AND MARK PLANContents Page Part 1: Executive summary Part 2: The Case Study examination Part 3: Commentary on candidates’ performance Part 4: Appendices Appendix

EXAMINERS’ COMMENTS AND MARK PLAN

Contents

Page Part 1: Executive summary

Part 2: The Case Study examination

Part 3: Commentary on candidates’ performance

Part 4: Appendices

Appendix 1: Financial statement analysis: Comparison of salon performance 15

Appendix 2: Financial data analysis: Calculation of gross profit claim: Loss of gross profit

attributable to shortfall in revenue for the 5 months to 31 December 2012

17

Part 5: Marking key

PART 1: EXECUTIVE SUMMARY

Introduction

This report covers the July 2012 Case Study (CS) exam It is issued in conjunction with two illustrative

scripts and related Examiners’ commentaries The first script was well within the top 25% of all assessed

scripts; the second failed the exam In reviewing these documents, it is important to be aware that it is rare

for a script to be uniformly ‘bad’ or uniformly ‘good’: a successful script will often present detailed coverage

of all requirements but include errors of calculation, spelling or logic; an unsuccessful script may contain

one or two strong sections or several excellent points but be let down by poor or incomplete text elsewhere Attached to this report are two appendices with examples of the sort of work that candidates did, or might

have done, under ‘financial analysis’ The two illustrative scripts offer further insights into this area

Overview of performance

74.1% of all candidates sitting the paper passed, compared with 73.9% in November 2011 and 75.2% in

July 2011 Successful candidates demonstrated their higher skills and used their four hours effectively so as

to be able to cover all key aspects of the exam They approached the tasks methodically and produced balanced, relevant answers addressing the key components of each of the three main requirements; clear

well-appendices; and succinct, focused executive summaries Many had an even spread of passing grades,

revealing an ability to assimilate the case material into a report together with commercial knowhow and

appropriate professional scepticism They had clearly prepared well for the exam, making the necessary

effort to master the Advance Information and to refine their exam technique

The subject of the case is Luvlox Ltd (LL), a privately-owned, high-end hairdressing company headed by

Amanda Richards, a well-known former actress LL opened its first salon in 2008 in Newcastle-upon-Tyne in the north-east of England and now has two further salons in the nearby towns of Wallsend and Gateshead

LL prides itself on its reputation for quality The candidate is in the role of Ashley Franklin, a final-year

trainee Chartered Accountant working for Baron Young, providers of business advisory services to LL You report to one of the partners, Sarah Chandler

The exam requirements followed on from the Advance Information (AI) They comprised:

1 A comparison of the 2012 revenue and gross profit of the three salons by reference to key performance data (KPD) and a discussion of certain grievances raised in relation to LL’s new incentive scheme

2 An evaluation of the proposal to offer an additional 25% loyalty discount to all existing clients of the

Wallsend salon during the period to 31 December 2012 following a fire at that salon

3 A strategic, operational and ethical assessment of an opportunity to open a new salon subsidised by a product supplier

In the rubric, candidates were specifically told to provide an executive summary and that the report should

be balanced between the three elements

As always, each requirement contained several parts Candidates had to identify these and then tackle them

in an orderly manner In particular:

 At Requirement 1, the accounts captions to be analysed by candidates (including reference to the key

performance data) were clearly set out, and the incentive scheme issues also had to be addressed

 At Requirement 2, they had to perform calculations, state their assumptions and then advise on the

practical consequences of the fire

 At Requirement 3, they had to integrate a range of areas (including ethics) into a cohesive narrative

In broad terms, all three requirements necessitated skilful integration of AI and Exam Paper (EP) material

Also, as indicated by (i) the instruction to candidates to balance their report and (ii) the marking key, the

three main elements of the report were equal in importance: a candidate spending too much time on any

one section was likely to have missed the opportunity to gain passing grades in others Most made good

use of the case material (both AI and EP) but were not as effective in describing the wider context Better

ones ensured that their scripts followed a clear progression from Assimilating and Using Information to the

other three skills areas and thus achieved uniformly high grades across a requirement Coverage of ethical issues (mainly arising at Requirement 3) was better than in some recent sessions This was pleasing,

given the comment of one tutor firm that “no obvious ethical issues were stated [in the AI] so candidates

needed to think through the business issues to identify likely areas.”

Candidates who failed did so for various reasons, including the familiar one – poor time management As

often, this resulted in unbalanced answers (incomplete Requirement 3 or rushed executive summary)

However, perhaps the most significant reason for failure at this sitting was the inability of candidates to

question assumptions and to exercise judgement – and in particular to apply professional scepticism –

resulting in very poor grades in some Applying Judgement (AJ) boxes across all three requirements Many completely failed to challenge the data provided to them (Irina’s adjustments at Requirement 1; survey

output at Requirement 2; developer claims at Requirement 3), even though these were clearly from biased

or at least questionable sources For candidates in the lowest quartile, professional scepticism (often with

these two words as a heading in their report) was often restricted to the customary misguided belief that

LL’s own management accounts were unreliable

Requirement 1 mainly tested financial statement analysis skills, and candidates should have expected

this Most tackled it methodically, using the headings given (revenue and gross profit) to ensure coverage

of all the main elements for each of the three salons Overall performance was gratifying, with better

candidates developing their analysis of the income statement by performing additional calculations that

made use of the KPD, such as revenue per stylist or products sold per appointment Weaker candidates

often did not link their analysis effectively to the KPD (which they were specifically told to do), and thus their explanations for changes in the figures were unconvincing There was also a second part to Requirement 1 (dealing with incentive scheme issues), which entailed only a small amount of computational work Those

who did not give themselves enough time to think and write about these issues deprived themselves of the chance to achieve additional passing grades Candidates will have anticipated a requirement or part-

requirement about the incentive scheme, since it formed a central exhibit within the AI, but many were

clearly not expecting it to appear in this guise and floundered in an unfamiliar scenario

Requirement 2 involved financial data analysis and the ability to challenge assumptions Candidates will

have expected a calculation in relation to the business interruption policy, based on Exhibits 9 and 11e, and there was evidence that they had practised such calculations prior to the exam Many were therefore able

to achieve passing grades for the basic number-work However, a very large majority did not see fit to

question the science of the data with which they had been presented This was disappointing as they will

have had ample real-life experience of surveys and should have been well aware that answers can be

unreliable In addition to the survey, they also overlooked the need to consider the accuracy of seasonality

and pricing figures that formed part of their calculations Consequently, this was the weakest requirement

Better candidates dealt well with the discursive part of the requirement, adapting as necessary what they

had learnt from the experience of Knightwaves in the AI Those towards the bottom of the cohort were

characterised by muddled calculations – often resulting in an implausibly high or low loss of profit – and/or

a thin coverage of the related practical issues, revealing a failure to grasp the key features of LL’s business model

Requirement 3 assessed wider business skills The issues involved in opening a new salon, including the

ethics of tanning and of unfair competition, were clearly flagged in the AI Those who had familiarised

themselves with the AI in overall terms, who dealt in an orderly fashion with all the main aspects – and who had allocated themselves sufficient time – managed a good spread of passing grades However, weaker

candidates tended to offer a ‘scattergun’ approach – perhaps a sign that they were unable to relate their

prior work on LL’s strategy to the specifics of this opportunity – and so produced unstructured answers

Many of the poorer scripts struggled to address more than two of either strategic or operational issues

LL was a newer and smaller company than in recent cases, providing a subtly different set of issues for

candidates to grapple with As one tutor firm remarked, this was an ‘interesting’ and ‘engaging’ Case Study, with ‘all the layers of complexity you would expect The paper also made sufficient use of the AI with

which a student needed to be very familiar to produce meaningful analysis’ In the words of another, ‘the

requirements were clear and unambiguous Students were not asked to do anything that they should have

considered to be unusual, unfair or outside their capabilities They will need to have been well organised to complete it in the time allocated, but it was a good test of their professional skills.’

PART 2: THE CASE STUDY EXAMINATION

Scenario for the paper (Advance Information)

The case relates to Luvlox (LL) Ltd, a company operating three hairdressing salons with total revenue in

excess of £5 million You, the candidate, are Ashley Franklin, a final-year trainee Chartered Accountant

working for Baron Young, a firm of Chartered Accountants and Business Advisors with its headquarters in

Newcastle-upon-Tyne in the north-east of England You report to one of the partners, Sarah Chandler

Four weeks prior to the examination, candidates were provided with a 37-page package of information,

containing a series of exhibits relating to LL and the industry in which it operates, comprising:

1 About you (Ashley Franklin), your employer (Baron Young) and your client (Luvlox Ltd)

2 The UK hairdressing industry: Background

3 Hairdressing: The business model

4 Luvlox Ltd: History and overview

5 Luvlox Ltd: The business

6 Email dated 19 July 2011 from Liz Newby (Accountant) to all Luvlox Ltd directors

7 Luvlox Ltd: Management accounts for the year ended 30 June 2011

8 Luvlox Ltd: Price list

9 Luvlox Ltd: Extracts from insurance policies

10 Luvlox Ltd: New incentive scheme (July 2011)

11 Press articles

Analysis of Advance Information (AI)

By carefully studying and analysing the AI, candidates should have formed a comprehensive picture of LL

and the industry, using facts and figures from across the material The AI was, as always, intended to be

largely self-contained: the 37 pages contained a myriad of information with which candidates had to be

familiar Key points are summarised below, with additional Examiner commentary in bracketed italics

After Exhibit 1 (candidate’s role), Exhibits 2-3 give an overview of hairdressing and the business model

(Industry exhibits are intended to ‘set the scene’, to provide an important context for the case and exam

requirements and to create a ‘level playing-field’ so that candidates do not have to carry out extensive

research of their own One key to a full appreciation of the AI is an ability to relate these general industry

issues (for example, in the LL case: typical margins for services and products, seasonality, insurance, visits

to old people’s homes, marketing, State Registered Hairdressers) to the company’s circumstances and to

other material in the AI While candidates are not expected to commit every sentence of these exhibits to

memory, they should aim to be aware of the main contents so that they can easily locate key topics in the

exam hall Thus mention of market growth (p7), pricing and payment (p14) and restrictive covenants (p12)

would in turn have enhanced candidates’ answers to each of the three requirements In addition, they could have linked information about employment patterns, increased demand among men, refurbishment /

exclusivity arrangements and the risks of tanning to the later press articles.)

Exhibits 4-5 are pivotal exhibits Exhibit 4 documents LL’s history and current position, emphasising the role

of the founder (Amanda Richards); the development of LL’s three salons and their target market; their staff

profile; and LL’s salon refurbishment and salon opening plans Exhibit 5 provides further detail about the

existing salons, highlighting their seasonality; recurring client base; pricing practices; supplier relationships; marketing; key risks; IT; health and safety; security; and environmental policy

(Some of these points link back to the earlier industry information – see notes to Exhibits 2-3 They also

provide an obvious connection to the next two exhibits – 2011 business review and management accounts.)

In Exhibit 6, Liz Newby briefs the directors on the June 2011 management accounts and current events:

 Client satisfaction remains high Gateshead consistently gains the highest scores; Newcastle the lowest

 Newcastle achieved good services growth, owing partly to upgraded signage, but a fall in product sales,

with items being badly displayed or promoted With trade slow on Mondays, the salon is to be closed on Monday mornings Costs were impacted by higher wages, following the recruitment of three new stylists

 Gateshead has benefited from specialising in colouring Two chairs are to be replaced by a toy area A

legal claim by a celebrity client traumatised by an exploding hairdryer has been settled for £25k

 Wallsend has had a good year, with the wedding package being popular, but the salon is inefficient: it

has the lowest gross profit / salon staff ratio, maybe because of poor equipment or under-trained staff

 Cash generated has recouped much of the large outlay incurred to equip each salon If this continues,

there should be funds for the planned refurbishments and openings

These comments are reinforced by Exhibit 7 (the June 2011 management accounts), which reveal that:

 Revenue was up overall, from £4,427k to £5,481k (23.8%), in all three salons and both business streams

 Appointment numbers were up in total from 95.7k to 114.8k (20.0%) and in all three salons

 Product sales volumes rose in total from 38.2k to 48.9k (28.0%); values from £631k to £821k (30.1%)

 However, product sales volumes and values were both down sharply at Newcastle

 Gross profit was up from £2,512k to £3,078k (22.5%), again reflecting growth in all three salons and

both business streams

 Operating profit was up from £407k to £551k (35.4%)

 Staff salaries were up from £1,429k to £1,796k, with a large percentage increase (33.9%) at Newcastle

 Employee numbers were up at all three salons and at Head Office

 Product costs rose from £350k to £437k (24.9% ie lower than the growth in product sales)

 Administrative expenses were up £422k (20.0%) from £2,105k to £2,527k, reflecting rises in all captions

 There were additions of £97k to property, plant and equipment

 There were modest increases in inventories, receivables and other current liabilities

 Cash rose from a £445k net overdraft to a £61k positive balance, mostly via operating profit generated

In summary, LL has grown quickly over the 3 years with a track record of achieving revenue increases,

healthy margins and strong cash flow despite the continuingly challenging economic environment However, there are various operational issues to be dealt with in each salon

(As always, time spent on the financial information would have been invaluable The management accounts and board briefing gave students ample material on which to carry out in-depth financial and operational

analysis on LL prior to the exam The industry background should have helped develop their wider sector

knowledge, enabling them to produce value-added analysis of the company’s performance They should

have recognised the need to understand the importance of the (non-financial) KPD and its link to the

financial data and to the recurring client numbers given in Exhibit 5.)

Exhibit 8 is the price list for LL services It shows that prices for women are much higher than for men, and

higher for cuts by senior stylists than by stylists; that discounts are available for over-65s and students; and that non-standard appointments (including wedding packages) are priced individually

(With so many variables, and no information about the mix of clients, it was not possible to do any detailed

calculations on this information to ‘prove’ the figures in the accounts However, it provided a broad context

against which candidates could analyse LL’s performance and the differences between salons.)

Exhibit 9 presents extracts from two of LL’s insurance policies Both are set out in the same way, beginning

with definitions of key terms, but with variations to reflect their different scopes:

 The public liability policy sets out the cover for LL in cases of injury It concludes by saying that the

cover is valid ‘provided that the Insured and their Employees hold qualifications recognised by the

hairdressing and beauty industry’, and it excludes injuries caused by sunbeds

 The business interruption policy deals with payment for loss of gross profit arising on interruptions

from floods, fires etc The loss would fall in two parts (‘shortfall in revenue’ and ‘increase in cost of

sales’), with a final clause that LL ‘shall endeavour as far as possible to mitigate the loss of Gross Profit, provided that such endeavour is not used to promote the Business excessively’ It sets out in detail the formula to be applied in calculating the shortfall in revenue for the salon(s) affected by the interruption

(These are clearly important documents Both have links to other AI material: the public liability policy is

connected to the hairdryer explosion at Gateshead and sections dealing with the risks of sunbeds; while the business interruption policy has echoes in the Knightwaves article (Exhibit 11e – see below), as well as

prescribing a method of computation that needs to be understood

Exhibit 10 sets out the terms of LL’s new incentive scheme launched in July 2011, awarding a bonus to any

salon achieving an increase of 10% in the ratio of salon gross profit / salon staff numbers The bonus will

comprise: an additional 10% of salary to each staff member; and a further £10k for the manager The costs will be reflected in the 2013 accounts and no adjustments will be made in respect of any ‘one-off’ items

(This exhibit also has links with other AI material: the incentive scheme has already been mentioned in

Exhibits 4 and 6, while the latter also discusses the relevant ratio in relation to Wallsend’s performance.)

Exhibits 11a-e are a series of press cuttings:

 In Exhibit 11a, we learn that the typical UK woman now spends over £25k on her hair in a lifetime and

that the average man is also spending more time and money on his hair

 Exhibit 11b warns of the dangers of sunbeds and the new law banning under-18s from using them

 In Exhibit 11c, we learn that the downmarket supermarket chain Sullivan has begun to offer haircuts in

the north of England, with prices around half of those at high street salons Discounted hair products will also be available, under an exclusivity agreement with Indigo, an established Canadian supplier with an aggressive overseas expansion policy

 Exhibit 11d notes that, at a time of high unemployment in the UK, there appear to be several thousand

vacancies in salons and barber shops across the country

 In Exhibit 11e, we learn about David Knight, whose ‘Knightwaves’ salon was badly affected by floods in

2010 and who managed to secure a short lease on a nearby property Though he lost clients in the

closure period, he retained a large number by offering a 40% discount He had to manage staff levels

and make an insurance claim, which included both fitting out and loss of profits for the closure period

(These articles shed further light on issues mentioned elsewhere: trends in consumer demand, employment (Exhibit 2); exclusivity deals, tanning (Exhibit 3); insurance claims for loss of profits (Exhibit 9).)

Overall, as tutors have commented, the AI may have been relatively short but it was full of relevant facts,

figures and data for candidates to assimilate While they may have already been familiar at a personal level with the hairdressing industry, analysis of the AI required careful thought and understanding of the business model, financial statements and related statistics The AI gave students sufficient information to prepare fully for the exam and plenty of potential areas for assessment

Information provided in the Exam Paper (EP)

The Exam Paper contained seven new exhibits, comprising nine pages of new information:

12 Email dated 25 July 2012 from Sarah Chandler to you

13 Email dated 19 July 2012 from Amanda Richards to salon managers, together with her follow-up note dated 20 July 2012 to Liz Newby

14 LL’s management accounts for the year ended 30 June 2012

15 Email dated 20 July 2012 from Irina Yu (Manager, Newcastle salon) to Amanda Richards

16 Email dated 24 July 2012 from Liz Newby to Sarah Chandler, with press release dated 23 July 2012

17 Email dated 20 July 2012 from Amanda Richards to Sarah Chandler

18 Press article

Exam requirements

Please prepare a draft report to the LL board, in which you should:

1 Compare the performance of the three salons for the year ended 30 June 2012

Your comparison should comprise a commentary on revenue and gross profit, as presented in Exhibit

14, by reference to the previous year and to the key performance data You should also advise LL on

how to respond to the issues raised in Irina Yu’s email to Amanda Richards (Exhibit 15)

2 Evaluate the proposal (Exhibit 16(i)) to offer an additional 25% loyalty discount to all existing clients of

the Wallsend salon during the period to 31 December 2012

Your evaluation should include calculations to show LL’s expected loss of gross profit arising from the

shortfall in revenue for the five months to 31 December 2012, in accordance with Liz Newby’s

instructions Please also advise on the staffing and other issues identified by Liz You should state any assumptions that you make

3 Assess the opportunity set out in Exhibit 17

Your assessment should cover the strategic, operational and ethical aspects of the proposed new salon opening and related product supply arrangement

Candidates were also told to include an executive summary and to balance their report across the three

detailed requirements They were given a suggested time allocation, unchanged from recent Case Study

exams, as well as other guidance that should now be familiar in relation to executive summaries, the

discussion of ethical issues within their answer to the requirements, the need to attempt all requirements and, for each of these, to address all four skills areas: Assimilating and Using Information (A&UI), Structuring

Problems and Solutions (SP&S), Applying Judgement (AJ) and Conclusions & Recommendations (C&R)

The time allocation suggested to candidates was:

Candidates should have spent time studying Exhibit 12 carefully so as to understand the requirements and key elements of each; digest the other new exhibits (management accounts, discount scheme proposal and related press release, new business opportunity and related press article); and identify the related AI

exhibits to integrate into their answers

For Requirement 1, candidates should then have begun a more detailed review of Exhibit 14, enabling them

to assess the 2012 accounts in the light of their analysis of past results and key performance data (KPD)

carried out in preparation for the exam For Requirement 2, it was essential to recognise that the relevant

calculation was to be based on the insurance policy extracts at Exhibit 9 Finally, for Requirement 3,

candidates had to read Exhibits 17 and 18 and relate them to relevant material within the AI referring to:

beauty & tanning; Sullivan; Indigo; previous salon openings; recruitment; legal restrictions on ex-employees With proper time allocation, candidates should have been able to complete these tasks within the four hours available to write a well-balanced report A danger may have been to spend too long on Requirements 1 and

2 so that Requirement 3 (and the executive summary) was rushed and thus unstructured or short of content Not for the first time, there was much evidence of such time pressure, particularly for the weaker candidates

Analysis of Exam Paper information

From an initial reading of the new exhibits, candidates should have established that:

 LL has increased total revenue and gross profit in 2012, but – because of the staff numbers element of the incentive scheme ratio – only Gateshead has qualified for the bonus

 The Newcastle manager believes that she and her staff are also entitled to the bonus as the salon’s

results have been distorted by factors outside her control

 Wallsend has suffered a fire, giving rise to an insurance claim and the need to devise a discount scheme and other strategies to retain its clients in the short term by attracting them to one of LL’s other salons

 LL has been presented with an opportunity to open a new salon away from its existing base, with the

fitting-out to be paid for by Indigo under an exclusivity agreement

A more detailed review of the EP should then have elicited the key facts to be addressed in the exam

The email at Exhibit 13 shows that:

 Client feedback continues to be positive, though with some scores down on 2011

 Recurring clients are: Newcastle 4,500, Gateshead 6,100 (both up 100); Wallsend 6,200 (down 100)

 Gateshead staff will receive a bonus and manager Renata Taylor will receive the £10k manager bonus

 Irina Yu, Newcastle manager, has queried its failure to earn a bonus In an email (Exhibit 15), she sets

out her grievances on three grounds which she claims arise from Head Office (HO) decisions:

 Two stylists have been on long-term sick leave because of stress It was HO’s decision not to replace them as the salon should be able to meet client demand using the remaining stylists

 LL’s prices for a Newcastle stylist’s visit to the local old people’s home – imposed by HO – are much lower than in the salon, reducing gross profit by £25k

 Newcastle was carrying excess colouring, mostly ordered at HO’s request and now obsolete HO

instructed a £20k write-off Newcastle had also not received credit for a related £8k supplier incentive

(Familiarity with the workings of the incentive scheme – introduced at Exhibit 10 – will clearly have proved

beneficial here.)

From the management accounts at Exhibit 14 (in similar format to Exhibit 7), we learn that LL has done well

in 2012, but with variations in performance across the three salons Specifically:

 Revenue has risen to £5.8m, up 5.4% on 2011, with growth across both business streams

 Revenue in both Newcastle and Gateshead is up by around 11%, but down by 4.6% in Wallsend

 The reduction in Wallsend is in both services and products

 Newcastle’s product revenue has gone back up, though still short of its 2010 levels

 Gateshead has the highest total revenue, with its share now over 40% of LL’s total

 Revenue mix has remained constant, with services continuing to contribute around 85%

 Cost of sales is down by 1.1% in absolute terms Gateshead has managed a reduction of 0.7% despite its large increase in revenue Stylist numbers are largely unchanged

 As a result, gross profit is up £0.3m (10.5%), with rises in Newcastle and Gateshead but a small fall in

Wallsend Margin is up in all three salons, taking LL’s overall figure from 56.2% to 58.9%

 Gross profit per stylist is up by 7.3% at Newcastle, 17.5% at Gateshead and 1.2% at Wallsend,

compared with the required increase of 10% to qualify for the bonus

 KPD reveals rises in appointment numbers (4.0%) and product sales volumes (7.2%)

(Candidates will have expected to be presented with 2012 management accounts Detailed analysis of the AI figures – 2011 accounts (including KPD and staff numbers), together with other information such as numbers of chairs (Exhibit 4), recurring client numbers (Exhibit 5), findings from client surveys (Exhibit 6) – was essential preparation for understanding key relationships within the accounts and the main drivers of LL’s performance.)

Exhibit 16 presents the proposed discount scheme for Wallsend clients following the recent fire at that salon (explained in the press release at Exhibit 16(i)) It provides the results from a phone survey of clients on which

candidates are expected to prepare a loss of gross profit calculation as part of an initial insurance claim:

 LL proposes to offer an additional 25% loyalty discount to existing Wallsend clients on the cost of one

appointment (not product purchases) at Newcastle or Gateshead from 1 August to 31 December 2012

 From the survey, LL estimates the number of clients who would take up the offer, how many subsequent appointments they would have and how much on average they would spend on products

Candidates are additionally asked to advise LL on how to manage the existing Wallsend staff, and level of

activity, staffing and quality of service at Newcastle and Gateshead on the transfer of work to these salons

(This new information was cross-referenced to the business interruption insurance policy at Exhibit 9, and

candidates should have realised that their calculation of lost profit needed to be based on the methodology set out there However, they had to recognise that this calculation was based on a range of assumptions –

some more obvious than others – and that they needed to discuss these To produce a fully rounded review

of the situation facing LL, they also had to integrate their preparatory work in relation to the workload and

specific issues at each salon, and the past experience of Knightwaves (Exhibit 11e).)

From Exhibits 17 (email from Amanda Richards to Sarah Chandler) and 18 (press article), we learn that:

 A new shopping mall is opening in York in July 2013, 1km away from the salon run by Marie Duval,

Amanda Richards’s mentor

 The developers expect 100,000 visitors each week: 50% ‘affluent’, 60% aged 18-35 and 75% female

 Renata Taylor’s husband’s job is moving to York, so this could present a new management role for her

 One unit (on the 2nd floor) will be a 25-chair salon; the mall’s developers have asked LL to occupy it

 It would ideally have a beauty / tanning area, which would be popular among the likely mall clientele and also increase hairdressing revenue

 This unit has been rejected by another company, as a Sullivan supermarket opening on the ground floor may also incorporate a salon

 LL has been in discussions with Indigo, who would pay in full to fit out the salon (including IT upgrade)

 In return, LL would give Indigo exclusivity on its products at the salon for 12 months from 1 July 2013

 The average margin on Indigo products would be 5 percentage points lower than for existing products

(Candidates may have predicted a new business opportunity but are unlikely to have expected one arising in precisely these circumstances For a proper appreciation, they had to be fully familiar with the AI – notably: LL’s stated plans to open new salons and to rationalise its supplier portfolio; Amanda’s past links with Marie Duval; LL’s attitude towards beauty and tanning services; and the strategies of Indigo and Sullivan.)

The EP develops a number of features of LL’s business from the AI, each needing a different technique for advising the board Exhibit 12 sets out the route to be followed in writing the report

 The management accounts require a clear focus on financial statement analysis, together with a

high-level appreciation of the incentive scheme

 The discount proposal involves financial data analysis together with a broader business perspective and

a strong element of professional scepticism

 The York opportunity entails an understanding of LL’s strategic objectives and operational needs

The analysis of LL’s accounts at Requirement 1 had to cover the items specified at Exhibit 12 It should

have been apparent that this involved a comparison of the three salons and appropriate integration of the

KPD (but not the statement of financial position, working capital ratios or the cashflow statement) With a

logical approach and judicious (ie not excessive) inclusion of the KPD, the numerical analysis (mainly

calculations of absolute changes and percentage variances) could have been carried out quickly, leaving

time for a sensible commentary on this analysis that took account of the business issues arising in the AI

For Requirement 2, candidates had to perform a structured calculation based on the survey data provided

and referring back to the accounts and other financial data provided elsewhere in the case They then had to apply a healthy degree of professional scepticism to this data and to assess the wider implications of the fire for the overall LL business A logical approach with careful planning would again have reaped dividends

Finally, Requirement 3 involved an evaluation of a new business opportunity with numerous facets to it that

needed to be balanced in order to reach a well-argued decision Here too, professional scepticism was

required to challenge figures that did not appear to have a rigorous basis In relation to ethics, candidates

had to link some of their preparation (notably in relation to sunbeds and restrictive covenants) to the actual

scenario with which they were now being presented

As one tutor firm commented, these were realistic scenarios consistent with the AI The requirements were reasonable given the AI but contained a lot of information to absorb and analysis to do in the time available

Summary of grades available

The Examiners identified five topics for which grades would be awarded, corresponding to the requirements: Executive summary; Comparison of salon performance; Evaluation of proposed discount; Assessment of

salon opportunity; Overall paper Candidates were rewarded according to how well they demonstrated, under each of these topics, their application of the four Professional Skills For each topic, there were a number of

‘boxes’ under each of the four skills, representing specific areas in which the skill was to be demonstrated

Within each, candidates were awarded one of five available grades:

40

In broad terms, the marking key reflected a number of structural changes (publicised prior to the exam):

 a reduction in the number of boxes, from 42 to 40;

 elimination of all ‘framework’ boxes;

 an extension of the re-presentation of the executive summary introduced for November 2011, whereby each column corresponds to a requirement;

 additional emphasis on appendices (now comprising 2 separate boxes under ‘Overall paper’)

PART 3: COMMENTARY ON CANDIDATES’ PERFORMANCE

Overview of professional skills

In each of the three main requirements, but to varying extents, candidates had to integrate the AI with the

new EP material in order to build their answers In general, with grades for ‘Identifies business issues’ or

‘Describes wider context’ available in each requirement, a clear differentiator at A&UI was between those

who had familiarised themselves with the AI and the broader scenario and those who had not Candidates

generally demonstrated good SP&S skills, though again with variation within and across the requirements

Under AJ, the strongest scripts contained reasonable, balanced and appropriate judgements built on

analysis and demonstrating a logical flow of decision-making and real understanding of the case However, the overall skill of judgement, especially professional scepticism, was a significant differentiator Better

scripts did well at C&R, offering clear conclusions and sound commercial recommendations for all three

requirements (and in their executive summaries), derived from their analysis and judgement Most

candidates now make sure to include a C&R section for each requirement; differentiation thus lies in the

quality / relevance of such sections As usual, those of weaker candidates were indecisive or misdirected

Executive summary

The new structure for this part of the marking key, introduced in November 2011, is designed to reflect

more closely the format adopted by candidates, with the summary of each requirement being presented as

a discrete section For this exam, the structure was further enhanced with broad topic headings being used under each requirement and all boxes treated as ‘Range’ for consistency with the rest of the marking key

The largest number of passing grades was earned for the section on Requirement 1, followed by

Requirement 3 and then Requirement 2, mirroring candidates’ performance in the main body of the report

Within each section, the number of passing grades for the two boxes was broadly equal However, overall

grades were lower than in most recent sittings, with time pressure clearly playing a major part Some

scripts had very poor (rushed) executive summaries, even some where the main report was good As the

executive summary now represents 15% of the total grades available, failure to give it the appropriate

attention is a high-risk strategy One script had only a single number in its entire summary – 25% (ie the

loyalty discount) For Requirement 1, candidates may have mentioned the term ‘gross profit’ and provided

the headline figures, but gave no explanation for changes Where ID/NA grades were awarded, this was

typically because of glaring omissions, such as nothing on KPD or the bonus scheme (Requirement 1) or

assumptions (Requirement 2); lack of recommendations; or just general absence of detail

The best summaries were, as ever, of a sensible length (around 10% of the total report), covering the three main requirements evenly, integrating the key numbers and providing clear analysis that led seamlessly to

conclusions and recommendations with a business focus and ability to see the ‘big picture’ Their authors

had set aside time to isolate their key findings, resulting in a high-impact précis that would have the desired effect of drawing the reader into the report eg at Requirement 2: “A concern is the potential loss of recurring clients and impact on client levels once Wallsend reopens LL must transfer staff to either Gateshead or

Newcastle This will place a significant burden on capacity, particularly at Newcastle… Clients must be

informed about the promotion and encouraged to book appointments to minimise waiting times.”

Requirement 1: Comparison of salon performance

As for the equivalent in the past few sittings, this was the best of the main requirements, with candidates in general focusing appropriately on the set tasks As noted above, they should have expected the 2012

management accounts and so been well prepared to review them Those who had anticipated a fuller

analysis (all the income statement and/or balance sheet and statement of cash flows) should have been

relieved at the scope of the requirement, but less adaptable candidates struggled to adjust and produced

irrelevant commentary The challenge was to analyse each salon fully under the specified criteria Most

tackled the core financial statement analysis methodically, using the headings given (revenue and gross

profit) to ensure coverage of all the main elements, with the gratifying result that a strong majority achieved passing grades at A&UI box 1 and SP&S box 2

Revenue, gross profit and KPD

Weaker candidates just said – or implied – that revenue was up or down because sales were up or down, or made other banal observations (“Please note that the increase would not have been so high if the 2011

figures were not so low”) They thereby failed to make use of the clues given in the AI (notably at Exhibit 6) to

explain the positive and negative features of each salon’s prior-year performance and likely drivers for 2012

Better candidates realised that, in order to contextualise their comments on individual salons, they also

needed to provide some general commentary on LL’s overall performance Many recognised that revenue

growth was greater than the market forecast, but did not get into the detail of revenue growth for services

and products or the overall revenue mix Although the requirement was for a ‘comparison’, the vast majority

of candidates reviewed each salon in turn and only under their conclusions – if at all – did they compare

them Such candidates also typically failed to earn passing grades at A&UI for setting their analysis in the

wider business context (all the items on the marking key here are derived straight from the case material) Some candidates displayed the results of their own research, such as media coverage of the impact of the

recession on the UK services sector Others went way beyond the extremes of relevance, such as the one

who provided a whole appendix, sourced from the Good Salon Guide, with columns for ladies’ blow dry /

colouring and rows showing four different salons with a list of each one’s basic prices for each service

Coverage of gross profit was good, with candidates generally calculating the figures for each revenue stream correctly by adjusting for the ’80:20’ split of product costs (AI, p21) and offering plausible reasons for the

changes at each salon

The treatment of KPD was variable In many cases, this will have been a function of how well candidates had prepared themselves beforehand to work with the data Good scripts made astute use of the appointment

and product numbers to calculate ratios (eg average product revenue per appointment; appointments per

stylist), enabling them to add colour to their discussion of the main accounting figures Weaker candidates

just quoted the KPD without any developed thinking or computations This was disappointing, given that the data was provided in the AI, allowing plenty of time for them to think about how it could be used to provide

other relevant evidence Good candidates also wove other case data into their narrative, notably recurring

client numbers and feedback (Exhibits 5 / 6 / 13) Appendix 1(B) below shows the range of calculations that candidates could have carried out on the KPD although this was a fuller list than could have been produced

in the time available In addition, candidates will have found that a further reward for doing this work was that they could make good use of it in Requirement 2

A well-prepared candidate was able to demonstrate full familiarity with the broad sweep of the case material

in a succinct way: “Newcastle increased service revenue by 6.5% to £1,282k, a function of a 4.9% increase

in the number of appointments and a rise in service revenue per appointment (£39.10 to £39.69) In 2011 the window displays were updated, which appears to have led to an increase of clients in the salon.”

Incentive scheme

The least predictable part of the requirement – incentive scheme grievances – was, perhaps inevitably, less well done, meaning that candidates struggled to achieve passing grades for AJ Many were content with

general thoughts on the scheme and how it might be improved, probably reflecting what they had expected

to be asked They did not assess Irina Yu’s three complaints individually so could not conclude on their

legitimacy Most candidates did not question the size or validity of the adjustments at all; if they mentioned

them, it was merely a case of copying the facts from the exam Better candidates included assessments

such as (for the first issue): “These staff have not contributed to revenue in the months they have been on

leave, yet have resulted in a cost to the salon Therefore it is not appropriate to include them in the

calculation as having two fewer stylists can have a significant impact on revenue.” Weaker ones went off on tangents: “Amanda needs to explain employment laws to Irina regarding the dismissal of sick employees.”

Good candidates concluded on whether the bonus should be paid, often saying that, even if Newcastle had not strictly met the criteria, it would be a politic in the circumstances to make a payment to staff – and that

the scheme needed to be redesigned for future purposes By doing this, they were able to score well under the C&R boxes Candidates who also provided conclusions and recommendations from their core financial analysis could thus achieve a passing grade for both boxes In the latter case, there was scope for them to

offer their own suggestions, with the introduction of a loyalty programme being very popular

Requirement 2: Evaluation of proposed discount

This was the least well done of the three requirements There were in effect three elements:

 Loss of gross profit calculation

 Discussion of assumptions (professional scepticism)

 Advice on staffing and other issues

The best candidates achieved good grades for all three, showing what could be done by careful planning

and concentration on the specified tasks and by following the structure of Liz Newby’s guidance, thereby

reflecting a good high-level understanding of the insurance claim and its role in LL’s finances They

recognised that the company’s key objective in the aftermath of the fire was to maintain its existing

business with as little disruption as possible rather than to maximise the insurance claim at all costs

Loss of profit calculation

The calculation required here was relatively straightforward but without a few valuable minutes of careful

planning it would have been easy to become lost in the detail Many candidates managed to get it correct –

or at least enough of it to gain passing grades at the relevant places (AU&I box 1, SP&S box 1) Even

among better ones, however, there were recurrent errors eg taking the wrong seasonality figures; applying

the discount to all appointments and/or to product sales; or calculating only one of the two revenue totals

(‘Annual’ and ‘replacement’) Others managed to compute relevant revenue figures but did not then take

the final step of applying a gross profit percentage

Among weaker and/or less organised candidates, there was a myriad of bizarre schedules It was apparent that they did not know what they were wanting their calculations to show and so had no idea whether their

final figure was plausible Some presented a choice of calculations, perhaps hoping that among them the

marker would find one worthy of marks Alas, in such cases there was usually no such ‘best’ calculation

and the outcome was a low grade here – and then elsewhere too as the time squandered could not be

made up in the rest of the paper One candidate stretched the Examiners’ goodwill to unreasonable limits

with the single sentence: “I have not managed to complete the calculation but with more time I would have” Unfortunately there were many poor and/or incomprehensible calculations All the insurance details had been given in the AI, and candidates had had ample opportunity to test practice scenarios, especially since – in view

of the policy extracts and the Knightwaves article (with its focus on discounting) – it was highly likely that an

insurance claim would come up In addition, the specific route was clearly set out at Exhibit 16(i), but too many candidates failed to follow it

Discussion of assumptions (professional scepticism)

A major weakness in this requirement was the almost universal failure to challenge the survey data and

LL’s extrapolations from it (primarily SP&S box 2 and AJ box 3) Exhibit 12 specifically reiterated the

instruction to candidates to ‘state any assumptions that you make’, but many simply accepted figures such

as the 5,000 client take-up, and they were happy just to compute the lost profit without questioning the

validity of its basis They were not troubled by the vagaries of human behaviour when responding to

surveys, by the exactness of the quoted average product spend or by the fact that 2012 seasonality

percentages (which were not given) might be very different from those achieved in 2011

Few considered altering the level or scope of the discount offered, just accepting the details given without

trying to offer additional advice Weaker candidates failed to grasp the commercial reality of the situation: “It

would be unwise to panic and give discounts for discounts’ sake: at present LL is a stable business ”They gave little thought to Wallsend’s likely performance levels after its reopening – though a sizable minority did

at least wonder whether it would take as long as five months for the fire damage to be repaired An

awareness of the Knightwaves experience documented at Exhibit 11e should have provided candidates

with a benchmark against which to gauge LL’s claims; a surprising number failed to take advantage of this

Commentary on staffing and other issues

Coverage of the staffing and related issues (mainly SP&S box 3, AJ box 2) was good Many addressed the considerations of capacity and stylists leaving, realising the impact that this could have on the clients Here too, however, candidates did not refer enough to the Knightwaves experience; those who did so had a

ready-made source of material to integrate into their answers, notably in relation to staff mobility and

retention Better candidates went on to consider the wider consequences of the extra activity for Newcastle and Gateshead: a well-rounded appraisal would integrate several key features of LL’s business into a

succinct few sentences: “During the closure period, LL must ensure no reduction in the quality of service

being provided to clients It should monitor any decline in satisfaction (as reported through client feedback), closely watch any changes in key performance data and ensure that staff remain highly motivated.”

For some, the main issue here was how the fire would impact on the 2013 bonus scheme While this would undoubtedly concern staff, it was not critical to LL’s immediate need to maintain its business and retain its

clients In any case, nothing was known about the 2013 scheme except that its details were to be

announced shortly Some candidates also dealt with other tangential aspects of the insurance claim,

especially ethics This arose mainly in relation to the possible causes of the fire or the planned

refurbishment programme: “The insurance company may not be aware that LL was planning to refurbish

the salon in 2013 This may be unethical as there is a legal duty to disclose under the Fraud Act” As the

requirement and the insurance policy extracts related only to loss of gross profit, refurbishment was not a

central issue here though candidates could score marks under AJ box 2 for pertinent comments

Another weak area was the practical aspects of the claim (AJ box 1) Better candidates recognised that for

a full evaluation of the proposal, they should consider the likely strain on LL’s cash and its senior people

Both the claim itself and the practical consequences of the fire would put LL’s recent history of healthy

inflows and the skills of the management team to a stern test over the coming months Some took a rather

nạve view: “The insurance will not cover all costs so consider getting a new policy that will.”

More than half of all candidates achieved a passing grade under C&R at both box 1 and box 2, Some

candidates succeeded in capturing the essence of the matter in a short, well-directed paragraph: “Given

the competitive nature of the hairstyling industry and the importance of client loyalty, client retention is

crucial To minimise the long-term tailout from the fire, offering a discount is an astute move to encourage

clients’ temporary relocation The insurance policy also requires LL to mitigate the loss of gross profit.”

Requirement 3: Assessment of new salon opportunity

As for Requirement 2, this section also had a number of components that had to be identified and tackled

Candidates needed to cover the wide range of issues raised by the new salon, while focusing on the key

points They had to follow the case instructions to address the ‘strategic, operational and ethical’ aspects of this opportunity However, there were a number of dimensions that would have been less easy to anticipate: the potential competition from Sullivan, the impact of the Indigo product supply arrangement – and the

interaction of these two themes

This requirement should have been well within the capabilities of well-prepared candidates, offering them

plenty of scope to apply their own commercial analysis Indeed, those who dealt with all the main aspects

generally obtained a good spread of passing grades, notably for the three boxes at SP&S where they

were rewarded for respectively identifying the main strategic, operational and ethical issues Less

organised candidates had overrun on the rest of the exam, resulting in sparse answers here – a common

problem at Requirement 3 for those unable to plan their four hours effectively Poorer scripts tended to

offer a ‘scattergun’ approach and so produced unstructured answers, while stronger ones kept focused on

the ‘big picture’ of the opportunity

At a superficial level, Requirement 3 was self-contained and could have been tackled without detailed

reference to the AI However, there were a number of AI documents to which candidates needed to refer in order to enhance their answers – not least Exhibits 4 / 5 (LL’s strategic objectives and risks) and Exhibit 11c (Sullivan / Indigo), for which they would have scored well under A&UI

Weaker candidates provided very little detail, struggling to identify more than two of either strategic or

operational issues Under ethics, most raised the commercial and health & safety concerns with sunbeds,

but many ignored the question of proximity to Marie’s salon With the sunbed issue, it was pleasing to see

most candidates taking this right through to a conclusion or recommendation (“open the salon without

sunbeds”; “provide an alternative such as spray tanning”) They frequently assessed the reputational risk,

with elegant reference to other case material: “The increased risk of cancer may conflict with Amanda’s

involvement with charities and wig provision for patients (some of whom may be cancer sufferers)”

There was quite a bit of confusion over Sullivan Many candidates mistakenly believed that it had not yet

decided whether or not to open in the mall, rather than the actual situation – that it was definitely opening

but the inclusion of a salon was in doubt This may have just been careless misreading but it meant that

there were some straightforward points on the key that could not then be achieved Candidates must try to

digest fully the new information provided on the day

Most candidates did not analyse the Indigo proposal enough by considering its implications They seemed

unable to consider the downsides such as loss of control, or exactly how the refit would work and who was

responsible for choosing the décor They tended to concentrate more on the positives such as Indigo

financing the refit, and providing a new IT system, which were both seen as benefits

As with Requirements 1 and 2, candidates were expected to demonstrate their professional scepticism

here; and, as with Requirements 1 and 2, a majority failed to do so The focus in this instance was mainly

on the information supplied by the shopping mall developer – another party with a vested interest and

whose source was unclear – but also on the sketchy facts provided about both Indigo and Sullivan Too

many candidates accepted all this as hard fact without any questioning