CASE STUDY – JULY 2010 EXAMINERS’ COMMENTS AND MARK PLAN Contents Page Part 1: Executive summary Introduction Overview of performance Part 2: The Case Study examination Scenario for the paper (Advance Information) Analysis of Advance Information (AI) Information provided in the Exam Paper (EP) Examination requirements Analysis of Exam Paper information Summary of grades available 10 Part 3: Commentary on candidates’ performance Professional skills 11 Executive summary 13 Requirement 1: Review of Kreem’s financial performance 13 Requirement 2: Evaluation of proposals 14 Requirement 3: Discussion of diversification of packaging supplies 16 Ethics and professional scepticism 18 Overall paper 18 Part 4: Appendices Appendix 1: Financial statement analysis: Review of Kreem’s financial performance 19 Appendix 2: Financial data analysis: Analysis of proposals 22 Part 5: Marking key © The Institute of Chartered Accountants in England and Wales 2010 Page of 22 CASE STUDY – JULY 2010 PART 1: EXECUTIVE SUMMARY Introduction This report covers the July 2010 Case Study (CS) exam It is issued in conjunction with two other documents, comprising 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, and an unsuccessful script may contain one very strong section or several excellent points but be let down by poor or incomplete text elsewhere Unsuccessful candidates will also find helpful guidance in the July 2009 and November 2009 Examiners’ Reports, as well as the Case Study Manual, which forms part of the ICAEW Learning Materials and includes specific chapters on Introductory Financial Analysis and Ethics Attached to the report are two appendices with examples of financial analysis work that candidates did, or might have done, for Requirements and The two illustrative scripts offer further insights into financial analysis Overview of performance 78.6% of all candidates sitting the paper passed, compared with 73.3% in November 2009 and 77.7% in July 2009 Successful candidates provided structured attempts at the requirements, approaching the tasks methodically and including less irrelevant material, whether in the body of their reports or in the appendices One notable feature was the small number of NA grades awarded, indicating that candidates were more conscientious in addressing the key parts of each requirement The higher pass rate also reflects a rise in the number of candidates who delayed their sitting from November 2009, thereby affording themselves invaluable extra professional experience before tackling the very real-life exam that is the Case Study The subject of the case is Kreem Ltd, a company formed in 2005 when the production of two toiletries products and pre-production of two others were divested by a cosmetics multinational to four members of the management team Key goods and services are mostly sourced from a range of external UK-based suppliers (with one supplier per activity), so that Kreem is effectively just a sales and marketing operation, whose main asset is its brand This brand embraces the four products, each of which is ranked in the top 15 Customers are served from two distinct divisions, both profitable: Retail, accounting for around 80% of total revenue; and HCC (hotels, conference centres and cruise ships) In January 2010, Retail began a contract with its first-ever supermarket customer, Wychdean There are ongoing problems with the packaging supplier, Jugson, with the suggestion of a possible move to ‘multi-sourcing’, perhaps even overseas The exam requirements followed on from the Advance Information (AI) They comprised: (i) analysis of the 30 June 2010 accounts against actual results for the prior year (30 June 2009) and 30 June 2010 forecasts; (ii) a comparison between the proposal for Kreem to supply a new HCC customer and renewal of an existing contract; and (iii) discussion of a proposal to transfer some packaging work to a French 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: • • • At Requirement 1, the captions to be analysed – and bases for comparison – were clearly set out At Requirement 2, candidates needed to carry out calculations and then discuss them At Requirement 3, they had to integrate a range of areas (benefits and risks, operational, ethical) 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 broadly equal in importance: any candidate spending too much time on any one section was likely to have missed the opportunity to gain competent grades in others © The Institute of Chartered Accountants in England and Wales 2010 Page of 22 CASE STUDY – JULY 2010 Successful candidates produced well-balanced, relevant answers to the three main requirements, clear appendices and succinct, focused executive summaries The majority of scripts were 25-30 pages long (including around 3-5 pages of appendices) Many had an even spread of good competency grades (“grades”), revealing an ability to assimilate the case material into an appropriate, commercial report With reference to the four skills areas, candidates generally made good use of the case material (both AI and EP) and achieved Clearly Competent and Sufficiently Competent grades for Assimilating & Using Information Successful candidates then ensured that their scripts followed a clear progression from here to the other three skills areas and thus achieved uniformly high grades across a requirement They were able to demonstrate both ‘range’ and ‘depth’ in certain critical areas of the marking key Overall, there was a major improvement in candidates’ treatment of ethical issues, resulting in a higher than average number of candidates achieving competent grades for Applying Judgement than has often been the case Candidates who failed did so for a variety of reasons High among these was poor exam technique – generally a lack of time management, resulting in unbalanced answers (incomplete section for Requirement or rushed executive summary) For others, the reasons for failure rested within each requirement Requirement assessed financial statement analysis skills, and candidates should have expected this As in November 2009, performance was pleasing but there were features that clearly marked out weaker candidates Typically, they either (i) compared 2010 actuals with only one of the two prescribed comparators, namely actual 2009 figures and 2010 forecasts (some even went out of their way to compare 2009 actuals with 2010 forecasts); (ii) did not address all the elements of the financial statements that they were asked to cover (working capital was the most common omission); or (iii) calculated changes in key figures without giving explanations for the changes Requirement was the weakest requirement overall It involved financial data analysis (including sensitivity analysis) and the ability to discuss underlying assumptions – in the Examiners’ traditional adage, “make the numbers talk” – with due professional scepticism so as to arrive at a considered answer While the basic calculations were generally well done, weaker candidates were unsure as to how to approach the sensitivity analysis and/or what they wanted it to tell them Scripts towards the bottom of the cohort were also characterised by poor calculations, a blind acceptance of the figures presented and/or a thin discussion of the business issues surrounding the proposal Requirement tested candidates’ skills in strategic analysis and ethical considerations Answers of weaker candidates typically revealed a lack of ideas, either through poor planning and/or a failure to use the relevant material from the AI with the new exhibits in the EP to create an integrated assessment of the proposed change in supplier In summary, as tutor firms have remarked, this was a fair paper, and candidates who covered all aspects of the requirements, managed time effectively, applied the processes learnt in their studies and demonstrated their understanding of Kreem’s current business and finances should certainly have been able to pass © The Institute of Chartered Accountants in England and Wales 2010 Page of 22 CASE STUDY – JULY 2010 PART 2: THE CASE STUDY EXAMINATION Scenario for the paper (Advance Information) The case relates to Kreem Ltd (Kreem), one of the UK's leading toiletries companies, with a range of four products: Kreemee (bar soap), Liquee (liquid soap), Gellee (shower gel) and Foamee (bath foam) Kreem's annual revenue had reached £30 million by 2009, and it is planning further growth over the coming years You, the candidate, are Robin Tyler, a final-year trainee Chartered Accountant You have been working at Kreem for the duration of your training contract and have had a broad variety of experience across this time You currently report to Rameet Sharma, Director of Finance and Business Planning Four weeks prior to the examination, candidates were provided with a 53-page package of information, containing a series of exhibits relating to Kreem and the industry in which it operates, comprising: 10 11 12 13 About you (Robin Tyler) and your employer (Kreem Ltd) The cosmetics and toiletries industry: Background The cosmetics and toiletries industry: Business models The cosmetics and toiletries industry: Regulation All about Kreem Ltd Memo from Rameet Sharma to all members of the board: Business review for the year ended 30 June 2009 Kreem Ltd: Management accounts for the year ended 30 June 2009 Kreem Ltd: Summary of arrangements with Retail Division customers Kreem Ltd: Summary of arrangements with HCC Division customers Kreem Ltd: Supplier profiles Kreem Ltd: Financial forecasts Email from Henry Johnstone (Product Director) to Rameet Sharma: Packaging arrangements Recent press articles Analysis of Advance Information (AI) By carefully studying and analysing the AI, candidates should have formed a comprehensive picture of Kreem and the industry, using facts and figures from across the AI They were not required to carry out any significant research of their own: the AI was, as always, intended to be self-contained However, as usual, close monitoring of the media in the run-up to the exam was advised Key findings from the AI are summarised below Additional commentary by the examiners is provided in bracketed italics Exhibit sets out the background to the candidate’s role and areas of work, stressing the need to keep upto-date with industry issues, and the primacy of ethics in Kreem’s business (Exhibit was designed to alert candidates at the outset to potential ethical issues in the case material – reinforcing the message of the rubric that around 10% of grades in the exam are available for ethical issues As usual, some of these issues were obvious – such as Exhibits 13a-c (see below) – but others had to be identified eg misleading advertising and health scares, both with several references across the material.) Exhibits 2-3 give an overview of the cosmetics industry, with emphasis on the UK and on toiletries, and explain the business model and finances of a typical toiletries company The key messages that candidates should have extracted from these exhibits are as follows: • • • • • • • Cosmetics comprise a wide range of products; the largest UK sector is toiletries (eg soap, toothpaste) The industry is dominated by major companies with large product development and advertising expenditure Familiar toiletries names are PZ Cussons (Imperial Leather / Carex) and Unilever (Dove / Radox) In 2009 the total market was worth over £7.5bn at retail sales prices, up 3.3% on 2008 In 2009, toiletries grew in value (up 2.3% to £2.0bn) and volume Growth was mainly in liquid soaps (partly arising from anxiety about infections) and shower products, offsetting declining sales of bath additives and bar soaps Toiletries are now widely available at supermarkets as well as traditional outlets such as Boots With toiletries seen as essentials, the UK market has so far weathered the economic downturn, but only modest growth is expected in 2010 © The Institute of Chartered Accountants in England and Wales 2010 Page of 22 CASE STUDY – JULY 2010 • • • • • • • • • • • Faced by more competition, higher consumer expectations and rising commodity / energy costs, companies are looking to increase sales volumes, through product development, advertising and customer interaction The maturity of the market makes constant innovation and investment essential Some companies carry out all activities themselves, but many now source some or all from specialist suppliers, whether in the same country or abroad, usually under service level agreements (SLAs) Such external sourcing brings with it the inherent risk of loss of control over key processes Some toiletries are sold as ‘dual-branded’ products to hotels etc for use by their guests However, with hotels becoming more environmentally conscious, order quantities are starting to drop Established brands can sell for long periods with no major change in composition, packaging or size Regulation – and the risk of reputational damage – helps ensure health & safety throughout the production process Products must be clearly labelled, and packaging must be free from hazards Diversification by customer, product, supplier or geography (notably into Russia, China, India and the Middle East) is key, spreading risk and protecting companies from changes in consumer tastes Scientific and legal expertise, plus efficient IT at all parts of the supply chain, is also essential With regard to finances: • Companies typically use performance measures such as like-for-like sales, market share, EBITDA • Cash / working capital management is critical, as is (for those trading abroad) forex management • For companies like Kreem (ie brand owners and sales / marketing operations), most costs will be payments to external suppliers These vary with suppliers’ own raw materials / energy costs • Such companies also closely monitor the size and effectiveness of their advertising spend • Many companies now also measure performance against corporate responsibility (CR) criteria (Where detailed industry exhibits are provided, they are intended to ‘set the scene’ and to provide an important context for the case and exam requirements They are also intended to create a ‘level playingfield’ so that candidates 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 to the company’s circumstances Thus, for example: investment in R&D and advertising is critical for a company such as Kreem with a relatively mature product range (Exhibit 5); the growing importance of hand hygiene is key to the performance of Liquee (Exhibit 6); the risks of external sourcing are of particular significance for Kreem’s business model (Exhibits 10 and 12); the main components of costs will strongly influence its financial results (Exhibit 7); and the environmental ethos of hotels could impact the future of HCC division (Exhibits and 9) While candidates are not expected to commit every sentence of these exhibits to memory, they should ensure that they are aware of the main contents and that they can easily locate key topics in the exam hall Thus mention of eg diversification of supermarkets (p8), the move towards refillable products (p9) and the availability of grants in France (p13) would in turn have enhanced candidates’ answers to each of the three requirements.) Exhibit sets out the EU regulatory framework within which Kreem operates, with reference to such issues as animal testing, ingredients, product testing and labelling (Again, candidates were expected to notice linkages to other parts of the AI to enhance their understanding of Kreem, such as the product development cycle (p15) and the example product label (p53).) Exhibit is a pivotal exhibit, documenting the history and current position of Kreem: • • • • • • • • • It was formed in 2005, when a cosmetics multinational, KdK, divested the production of Kreemee and Liquee and pre-production of Foamee and Gellee to four members of KdK's UK management team These four set up the new company Kreem, and all have stayed with Kreem The consideration (funded by a 10-year KdK loan) was £32.5m, the value placed on the Kreem brand Kreem sourced its key goods and services from KdK after the buyout but then began to source externally from a network of (UK) suppliers it had built up It is now a sales / marketing operation with 90 employees, working to protect its main asset – its brand The brand is held in Kreem's accounts as an intangible asset and being amortised over 20 years Kreem is outperforming the UK market, with all four products in the top 15; this is expected to continue Sales values and volumes grew by 11.4% and 11.7% to £30.7m and 36.2m units respectively in 2009 Kreem sells exclusively to UK customers, in two distinct business segments: • Retailers (‘Retail Division’) – around 80% of the total • In 2009, Retail had three major customers, the largest accounting for half of its sales • Sales growth was 12.1% by value and 12.8% by volume • Wychdean, a supermarket chain, became a customer on January 2010 • Hotels, conference centres and cruise ships (‘HCC Division’) © The Institute of Chartered Accountants in England and Wales 2010 Page of 22 CASE STUDY – JULY 2010 • • • • • • • • Guests receive one ‘dual-branded’ bundle (small sizes of the four products) per room per venue • In 2009, HCC had four customers Sales growth was 8.9% by value and 8.0% by volume • By selling gift sets via customer shops and websites, Kreem could add 5% to revenue Kreem spends 9-10% of revenue on advertising It is about to launch its 2010 World Cup campaign Finished goods held at suppliers are shown as inventory in Kreem’s accounts until physically transferred to Kreem's customers, when they are treated as revenue Prices are based on quantity requirements agreed with customers, subject to trade discounts There can be large trade receivable / payable balances in Kreem's accounts (often over 60 days old) Key risks include demand risk and reputational risk (failure to meet safety / CR / ethical standards) Strategic goals include: European expansion; review of external sourcing; improving the product range Any prospective new product or customer is appraised at a discount rate of 9% (Some of these points link back to the earlier industry information, as illustrated in the notes to Exhibits 2-3 They also provide an obvious connection to the next two exhibits – 2009 business review and management accounts.) From Exhibits 6-7, we learn that: • • • • In a difficult economy, Kreem has done well in 2009 across all product ranges and both divisions, continuing into 2010 Liquee has been boosted by increased hand hygiene awareness, and growth is expected to continue Kreemee’s image has ensured continued growth despite the general decline in popularity of bar soap In addition to the sales data given in Exhibit 5: • Cost of sales rose from £10.0m to £11.3m across all captions (including manufacture and packaging) • Gross profit rose from £17.5m to £19.4m, up £14.0m to £15.2 in Retail, £3.5m to £4.2m in HCC • Other costs rose from £10.5m to £11.8m, partly from one-off expenditure on two R&D projects • EBITDA rose from £7.0m to £7.6m • Inventories rose by £0.3m to £1.6m; trade receivables by £0.4m to £5.5m; and trade payables by £0.6m to £3.5m; while cash increased from £2.6m to £4.9m (The financial information in any Case Study should be read and fully analysed – by candidates themselves – ahead of the exam itself, so as to form a detailed financial picture of the business For Kreem, they should have recognised the need to understand the relative size and importance of each product, customer and division and the reasons behind the results They had to appreciate the major components of all three primary statements and the links between them The next group of exhibits added to this information, with additional detail on Kreem’s principal business partners, both customers and suppliers, as well as forecasts for the next two years.) Exhibits 8-9 are summaries of arrangements with customers in each division: • • • • • • Quoted list prices are subject to trade discounts (historically 15% for Retail, 10-12% for HCC) Wychdean has had encouraging sales volumes for the first three months of its contract with Kreem Kreem’s contract with one HCC customer, Mangold, is renewable on January 2011 Mangold has around 5,400 rooms and 65% average occupancy All hotels are open every day, and one bundle is provided per day per room Bundle price is currently £1.02 before trade discounts The contract excludes public washrooms and sales of Kreem products from Mangold’s shops / website Wychdean's 2009 revenue and profit before tax rose from 2008, while Mangold's fell by 12% Exhibit 10 provides more background on Kreem’s key suppliers: Chicon (R&D); Cosmotest (testing); Beautical (ingredient manufacture); Klingley (manufacture); Jugson (packaging); Oloros (distribution); Rosebud / Utellus (advertising / market research) All are based in the UK and each arrangement is governed by an SLA and a code of conduct There is currently one supplier for each service, but Exhibit 12 reveals that Kreem may start to “multi-source” packaging in view of problems in the relationship with Jugson, which seems to be losing focus on Kreem It is considering other providers, both in the UK and abroad, who would have to meet 10 key objectives Exhibit 11 (prepared in May 2009 – before Wychdean and before the final 2009 results) presents the forecasts for the years to 30 June 2010 and 2011 They assume no major changes in customer or supplier base and reflect revenue growth to £33.0m in 2010 (above market average), with EBITDA of £8.2m; then 5% revenue / EBITDA growth in 2011 Volumes are forecast to rise to 36.9m and 37.9m units in 2010 and 2011 respectively © The Institute of Chartered Accountants in England and Wales 2010 Page of 22 CASE STUDY – JULY 2010 Exhibits 13a-c are recent press articles on: the move to refillable dispensers by some companies; trends in hotel occupancy rates, rebranding and expansion plans; and a warning that shower gels could carry health risks, from a recent case of wrong labelling Exhibit 14 is an example Kreem label bearing a number of symbols and stating that “all our products are made in the UK, so as to keep our carbon footprint as small as possible” Candidates should have found this an industry to which they could relate at a personal level, though some of the detail on business models (eg external sourcing) may have been less familiar and required closer study As always, time spent on the financial information would have been invaluable The management accounts and related commentary, together with 2010-11 forecasts – plus divisional and customer figures at Exhibit – gave students ample material on which to carry out in-depth financial and operational analysis on Kreem prior to the exam While no information was given on competitors, the industry background and KPIs (eg typical levels of R&D and advertising spend) should have helped in developing candidates’ wider knowledge of Kreem’s sector, enabling them to produce value-added analysis of the company’s performance Information provided in the Exam Paper (EP) The Exam Paper contained five new exhibits: 15 16 17 18 19 Email from Rameet Sharma to you: Review of results and business planning Kreem Ltd: Management accounts for the year ended 30 June 2010 Fax from Edwina Michaels (Longmore Hotels) to Roddy Ryan (Kreem Ltd) Email from Henry Johnstone to Rameet Sharma: Packaging arrangements – update Recent press articles Examination requirements Candidates were required to prepare a draft report to the board of Kreem, to include: An analysis of the company's performance for the year to 30 June 2010 A comparison between (i) the proposal for Kreem to become exclusive toiletries supplier to a new HCC customer, Longmore, and (ii) renewal of the existing contract with Mangold, on the basis that (owing to a conflict of interest) Kreem is not able to undertake both contracts A discussion of the proposal to diversify our packaging supplies by transferring a proportion of our annual requirement from Jugson to Tryphik in 2011 Additional guidance drew candidates’ attention to the expected approach for each requirement: • • • Their analysis at Requirement was to cover (i) revenue, costs and EBITDA compared with actual figures for the year to 30 June 2009 and forecasts for the year to 30 June 2010; and (ii) changes in working capital Their comparison at Requirement was to cover the contract period (1 January 2011 – 31 December 2013) It should include sensitivity analysis on selling price and a discussion of the assumptions affecting the other elements in their calculations They were also to set out the risks to Kreem of each contract and their recommended option Their discussion at Requirement was to consider the general benefits and risks to Kreem of having multiple sources rather than a single source for its packaging supplies It should also address the specific operational and ethical (including corporate responsibility) aspects of transferring some of the packaging work to a new supplier based outside the UK 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: Reading and planning Performing calculations and financial analysis Drafting the report © The Institute of Chartered Accountants in England and Wales 2010 hour hour hours Page of 22 CASE STUDY – JULY 2010 With only seven new pages, candidates should have spent time studying Exhibit 15 carefully so as to understand the requirements and to identify the key elements of each; digesting the other new exhibits (management accounts, proposals in relation to Longmore and Tryphik and latest press articles); and identifying the related AI exhibits to integrate into their answers For Requirement 1, candidates should then have begun a more detailed review of Exhibit 16, enabling them to assess the 2010 accounts in the light of their analysis of past results and forecasts carried out in preparation for the exam For Requirement 2, it was essential to recognise that the data for Longmore at Exhibit 17 had to be reread in parallel with Exhibit from the AI Finally, for Requirement 3, candidates had to read Exhibits 18 and 19 and relate these to Exhibit 12 (to which Exhibit 18 is cross-referenced) as well as other relevant (but not cross-referenced) material within the AI on the subject of external sourcing and Kreem’s own supply chain 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, as often, may have been to spend too long on Requirement – where the figures could be dissected in a number of ways – so that work on the other requirements was rushed and thus unstructured, short of content or littered with careless errors (or, in the worst cases, all three) Analysis of Exam Paper information From an initial reading of the new exhibits, candidates should have established the following (references in brackets are to the key AI exhibits to which this new information should be directly related): Kreem’s 2010 results showed strong absolute growth in revenue and profits, both apparently due to the new Retail customer, Wychdean (Exhibit 8) Kreem had been approached by a chain of hotels looking to change its toiletries supplier The chain was a direct rival of Mangold (Exhibit 9) A potential new packaging supplier based in France had been identified, as the problems with Jugson (the existing supplier) had not been resolved (Exhibit 12) A more detailed review of the EP should then have elicited the key facts to be addressed in the exam From the June 2010 management accounts at Exhibit 16 (in similar format to Exhibits / 11), we learn that: • • • • • • • • Revenue has risen to £37.4m, up 13.3% on forecast and 21.8% on the prior year Revenue from each major customer has risen, with the exception of Mangold (down 2%) Sales volumes are 41.6m units, up 12.6% on forecast and 15.0% on 2009 Growth has occurred across both divisions, but in particular Retail, as a result of the Wychdean contract Cost of sales and other costs have respectively risen by 32.5% and 18.9% to £15.0m and £14.0m All components of costs have risen, with the exception of R&D (back to its 2008 level of £0.6m) As a result, gross profit and EBITDA are 15.6% and 10.5% higher, at £22.4m and £8.4m respectively Inventories, trade receivables and trade payables have all risen significantly, but cash by only £0.2m (Candidates should have expected to be presented with, and be asked to analyse, 2010 management accounts Detailed analysis of the AI figures – 2009 accounts and 2010 forecasts – was essential preparatory work in helping them understand key relationships within the accounts and the main drivers of Kreem’s performance In particular, they should not have been surprised to see Wychdean having a significant impact on the 2010 results.) Exhibit 17 presents the Longmore proposal, providing key financial information that will enable a comparison with the equivalent data previously provided for Mangold at Exhibit This shows in particular that: • • • • • • Longmore has 3,750 bedrooms – a figure set to grow between now and 2013 as the company expands The proposed 3-year contract price from January 2011 is £1.00 per bundle, subject to negotiation Under its ‘green’ policy, a 20% non-replacement allowance is used to calculate annual purchases The contract excludes public washrooms Product sales from Longmore’s shops / website could add 10% to Kreem’s annual revenue Longmore's 2009 revenue and profit before tax were up 7% on 2008 (Although this new information was not in the same format as Exhibit 9, it should have been evident to wellprepared candidates that the contents were directly comparable To assist with the more discursive part of the requirement, one tactic might have been to produce a matrix highlighting the similarities and differences between the two proposals eg inclusion of website revenue or public washrooms.) © The Institute of Chartered Accountants in England and Wales 2010 Page of 22 CASE STUDY – JULY 2010 From Exhibit 18 (an update of, and in a similar format to, Exhibit 12), we learn that: • • • With the Jugson issues ongoing, Kreem has continued to consider transferring its packaging supplies The preferred choice is Tryphik, to whom 25% of supplies would move in 2011 for a one-year 'trial' Tryphik has capacity, suitable design processes, a good understanding of toiletries and strong environmental ethos With Tryphik being located in France, prices, invoices and payments would be set in euro (Again, candidates may have predicted a development in multi-sourcing in general and the Jugson situation in particular, though they may not necessarily have been prepared to assess the pros and cons of taking on a named new supplier For a full understanding of this proposal, they had to assimilate facts from a series of AI exhibits, not all immediately obvious – such as the reference to France (p13) and the arrangements with other Kreem suppliers at Exhibit 12 (notably Oloros and Klingley), as well as Exhibit 19 (see below.) Exhibit 19 is a series of news items, relating directly or indirectly to the two packaging suppliers: • • • One UK cosmetics company has cut 150 jobs by moving production from its Scottish supplier to Asia Tryphik has denied claims that it knew of animal testing at a company to which it supplies bottles Jugson’s directors have allegedly been misrepresenting the company and bribing prospective customers (Candidates may well have expected to see some ethical ‘vignettes’ presented in this way, following the wide coverage of ethics in the AI and the specific matters highlighted in similar format at Exhibits 13a-c The key here was to work out how important all of these issues were to the decision at Requirement and how to integrate them into the wider discussion.) The EP develops a number of features of Kreem’s business from the AI, each needing a different technique for advising the board: The management accounts require a clear focus on financial statement analysis; the hotel proposal involves financial data analysis together with a broader business perspective and a strong element of professional scepticism; while the Tryphik proposal entails a clear overview of Kreem’s supply chain and its underlying risks to the company’s performance Exhibit 15 sets out the route to be followed in writing the report The analysis of Kreem’s accounts at Requirement had to cover the items specified at Exhibit 15 It should have been apparent that full coverage involved not just the company as a whole but also the two divisions and the customer mix within each and sales volumes Segmental data was given in all cases, just as it had been in the AI The vital fact to establish – as the vast majority did – was that the accounts were significantly affected by the new customer Wychdean Stronger candidates appreciated that it was the entire set of accounts, ie not only the income statement but also working capital, that was affected With a methodical approach, the numerical analysis (to a large extent, calculations of percentage variations and traditional working capital ratios) could have been carried out quickly, leaving time to produce a sensible commentary on this analysis For Requirement 2, candidates had to perform a series of calculations (including sensitivity analysis) on two proposals, and then apply a healthy degree of professional scepticism in order to reach a conclusion that took account of both quantitative and qualitative considerations A logical approach would again have paid dividends Finally, Requirement involved a structured assessment of a different sort of proposal – to transfer some supply work overseas While candidates could have prepared in broad terms for such a discussion, merely reproducing such pre-prepared material would not earn much credit unless it was expanded into an integrated piece of writing that addressed the key elements of the requirement (‘benefits and risks’, ‘operational and ethical aspects’ and ‘outside the UK’) In relation to ethics, candidates had to read carefully the (brief) new press articles so as to understand the potential impact on Kreem of the issues raised Summary of grades available The Examiners identified five topic headings under which grades would be awarded, corresponding to the requirements: • • • • • Executive summary Review of Kreem’s financial performance Evaluation of proposals Discussion of diversification of packaging supplies Overall paper © The Institute of Chartered Accountants in England and Wales 2010 Page of 22 CASE STUDY – JULY 2010 Candidates were rewarded according to how well they demonstrated, under each of these topics, their application of four skills: • • • • A&UI SP&S AJ C&R Assimilating and Using Information Structuring Problems and Solutions Applying Judgement Conclusions & Recommendations 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 box, candidates were awarded one of five available grades: • • • • • CC SC IC ID NA Clearly Competent Sufficiently Competent Insufficiently Competent Insufficiently Demonstrated Not Addressed The total number of boxes for each topic and skill was as follows: • • • • • Executive summary Review of Kreem’s financial performance Evaluation of proposals Discussion of diversification of packaging supplies Overall paper A&UI 2 SP&S 14 AJ 11 C&R 2 10 Total 11 12 11 42 This reflects (i) an even balance between the three main requirements and (ii) a greater weighting towards SP&S and AJ, both of which were indicated to candidates in the rubric to the Exam Paper © The Institute of Chartered Accountants in England and Wales 2010 Page 10 of 22 CASE STUDY – JULY 2010 Of the 42 skills assessment boxes in the marking key for Kreem, four related to ethical issues (including professional scepticism): • • Requirement 2: Demonstrates professional scepticism on assumptions (range and depth) Requirement 3: Uses professional experience to consider ethical issues (range and depth) Thus ethical issues were thus a central part of Requirement 3, and application of professional scepticism was expected at Requirement Grades were also available in the executive summary for summarising the key findings on ethical issues In summary: • • • Most candidates are able to discuss specific ethical issues but many are less able to identify a range of such issues relating to a particular business environment 50% of candidates identified at least three areas of scepticism to address relating to the assumptions underlying the two proposals and 79% went on to develop their ideas to a sufficient level of competency Potential areas were: o The future number of hotel rooms and occupancy rates o The effect of Longmore’s refurbishment and rebranding programme o The future revenue from the hotels’ websites and shops o Any set-up and transition costs 69% of candidates identified at least three issues relating to the wider ethical issues affecting the transfer of some of Kreem’s packaging to France, Tryphik’s alleged link with animal testing or Jugson’s alleged making of bribes 80% went on to develop their ideas to a sufficient level of competency 84% of candidates (75% in November 2009, 61% in July 2009) demonstrated some professional scepticism regarding the financial data given to them, and 79% developed their ideas to a sufficient standard This is a significant improvement on 31% in November 2009 It is pleasing to see many more candidates are prepared to express their concerns about the information and data that is presented to them Overall paper Around 85% of candidates achieved competent grades under this heading The majority of candidates met the requirements and produced a well-structured document They wrote clearly and in a suitable tone, with less evidence of jargon or colloquial English than in the past Poor structure, where it occurred, was mostly at Requirement 3, where weaker candidates did not make the effort (or did not give themselves enough time) to plan their answer so as to cover all the main areas in a coherent discussion Illegibility remains a problem, albeit less common: in its worst form, it manifests itself in executive summaries hurriedly written in the last few minutes of the exam Finally, a record number of candidates did not follow the instruction to number the pages of their script While this was not penalised, the Examiners may be less tolerant in future: candidates and tutors have been warned! © The Institute of Chartered Accountants in England and Wales 2010 Page 18 of 22 CASE STUDY – JULY 2010 PART 4: APPENDICES APPENDIX 1: FINANCIAL STATEMENT ANALYSIS: Review of Kreem financial performance Income statement (to EBITDA) FORECAST 30-Jun-10 £000 Revenue Cost of sales 33,000 (12,000) Gross profit GP margin Other costs VARIANCE Actual 10 vs forecast ACTUAL 30-Jun-10 £000 CHANGE Actual 10 vs actual 09 ACTUAL 30-Jun-09 £000 13.3% 25.0% 37,388 (14,995) 21.8% 32.5% 30,691 (11,316) 21,000 6.6% 22,393 15.6% 19,375 63.6% -5.9% 59.9% -5.1% 63.1% (12,750) 9.8% (13,999) 18.9% (11,777) EBITDA 8,250 1.7% 8,394 10.5% 7,598 EBITDA margin 25.0% -10.2% 22.5% -9.3% 24.8% Like-for-like basis (re-presented excluding Wychdean) (to gross profit only as EBITDA data not provided) Revenue Cost of sales 33,000 (12,000) -4.4% -0.1% 31,553 (11,914) 2.8% 5.3% Gross profit 21,000 -6.5% 19,639 1.4% 63.6% -2.2% 62.2% -1.4% 26,200 6,800 33,000 16.8% -0.1% 13.3% 30,595 6,793 37,388 26.3% 5.1% 21.8% 24,760 6,793 31,553 2.2% 5.1% 2.8% GP margin Segmental analysis (i) Revenue Base case Retail HCC Excluding Wychdean Retail (adjusted) HCC (as above) 24,227 6,464 30,691 (ii) Gross profit (GP) & margin GP – Base case Retail HCC GP % – Base case Retail HCC 16,500 4,500 9.3% -3.0% 18,030 4,363 18.5% 4.9% 15,214 4,161 21,000 6.6% 22,393 15.6% 19,375 63.0% 66.2% GP – Excluding Wychdean Retail HCC GP % – Excluding Wychdean Retail HCC © The Institute of Chartered Accountants in England and Wales 2010 58.9% 64.2% 62.8% 64.4% -7.4% -3.0% 15,276 4,363 0.4% 4.9% -6.5% 19,639 1.4% 61.7% 64.2% Page 19 of 22 CASE STUDY – JULY 2010 Analysis of costs Cost of sales Manufacture and production Packaging Product management teams FORECAST 30-Jun-10 £000 VARIANCE Actual 10 vs forecast CHANGE Actual 10 vs actual 09 ACTUAL 30-Jun-09 £000 8,600 2,650 750 26.1% 27.2% 3.7% 10,845 3,372 778 32.9% 38.8% 7.5% 8,163 2,429 724 12,000 25.0% 14,995 32.5% 11,316 Less: Wychdean Other costs Selling and distribution R&D and product testing Design and creative teams Advertising and marketing Head Office admin ACTUAL 30-Jun-10 £000 (3,081) 4,300 500 1,500 3,400 3,050 12,750 -0.1% 11,914 5.3% 16.0% 14.2% 0.5% 16.4% -2.6% 9.8% 4,990 571 1,507 3,959 2,972 13,999 29.5% -53.8% 22.1% 38.8% 14.2% 18.9% 3,853 1,236 1,234 2,852 2,602 11,777 5,548 30,691 66 Analysis of working capital Trade receivables days (TRD) (i) Base case Trade receivables Revenue Therefore TRD = 7,535 37,388 74 35.8% (ii) Excluding Wychdean Trade receivables (7,535 – 1,577) Revenue Therefore TRD = 5,958 31,553 69 7.4% 2,383 14,995 58 47.1% 1,620 11,316 52 4,179 14,995 102 20.5% 3,469 11,316 112 Inventory days (ID) Inventory Cost of sales Therefore ID = Trade payables days (TPD) Trade payables Cost of sales Therefore TPD = Overall working capital Trade receivables Inventory Trade payables 7,535 2,383 (4,179) 5,739 5,548 1,620 (3,469) 3,699 74 58 (102) 30 66 52 (112) Overall working capital days Trade receivables days Inventory days Trade payables days © The Institute of Chartered Accountants in England and Wales 2010 Page 20 of 22 CASE STUDY – JULY 2010 Other analysis Revenue by division and customer FORECAST 30-Jun-10 £000 Retail Tongwell Eddlestone Nutra Wychdean (6 months from January) Other VARIANCE Actual 10 vs forecast ACTUAL 30-Jun-10 £000 CHANGE Actual 10 vs actual 09 ACTUAL 30-Jun-09 £000 13,550 5,500 3,750 3,400 26,200 -6.0% -5.8% -5.8% -3.1% 16.8% 12,737 5,183 3,544 5,835 3,296 30,595 1.1% 5.2% 5.0% -0.8% 26.3% 12,602 4,929 3,374 3,322 24,227 2,450 2,200 1,100 1,050 0.6% 0.8% -5.5% 2.2% 2,464 2,217 1,039 1,073 5.4% 6.6% -2.1% 8.8% 2,337 2,080 1,061 986 6,800 -0.1% 6,793 5.1% 6,464 Retail – total (unadjusted) Less: Wychdean 29,185 - 15.6% - 33,739 (6,757) 18.7% - 28,432 - Retail – total (adjusted) HCC (hospitality packs) Total (unadjusted) Total (adjusted) 29,185 7,752 36,937 36,937 -7.5% 1.4% 12.6% -5.7% 26,982 7,857 41,596 34,839 -5.1% 1.5% 15.0% -3.7% 28,432 7,739 36,171 36,171 HCC Sprague Hotels Alfresco Conference Centres Mangold Hotels Xanthus Cruises Sales volumes by product (000 units) Revenue : sales volume Retail Wychdean Retail excluding Wychdean HCC HCC list price So average HCC trade discount Total Total excluding Wychdean £ £ £ 0.90 0.90 0.88 0.91 0.86 0.92 0.86 0.85 0.85 0.84 1.02 14.0% 1.02 15.2% 0.94 11.2% 0.89 0.89 0.90 0.91 0.85 0.85 © The Institute of Chartered Accountants in England and Wales 2010 Page 21 of 22 CASE STUDY – JULY 2010 APPENDIX 2: FINANCIAL DATA ANALYSIS: Evaluation of proposals (Mangold v Longmore) (a) BASE CASE Mangold Hotels (a) Rooms (b) Occupancy (c) Days (note 1) (d) Total annual reqt [(a) x (b) x (c)] List price (£) (note 2) Average trade discount on list price Adjusted average price (£) Total annual contract value (£000) Discount factor @ 9% Total disc contract value (£000) 30-Jun-09 (note 3) 30-Jun-10 31-Dec-11 (note 3) 90 5,400 65% 365 1,281,150 0.94 11.9% 0.83 1,061 90 5,400 65% 365 1,281,150 1.02 20.5% 0.81 1,039 31-Dec-12 31-Dec-13 90 5,400 65% 365 1,281,150 1.02 12.0% 0.93 1,150 0.917 1,055 90 5,400 65% 365 1,281,150 1.10 12.0% 0.97 1,240 0.842 1,044 90 5,400 65% 365 1,281,150 1.10 12.0% 0.97 1,240 0.772 957 75 3,750 70% 0.80 56% 365 766,500 1.00 766 77 843 0.917 773 90 4,500 80% 0.80 64% 365 1,051,200 1.00 1,051 105 1,156 0.842 973 150 7,500 85% 0.80 68% 365 1,861,500 1.00 1,862 186 2,048 0.772 1,581 TOTAL 3,843,450 3,630 3,056 Longmore Hotels (a) Rooms Occupancy Allowance for non-replacement (20%) (b) Occupancy – adjusted (c) Days (note 1) (d) Total annual reqt [(a) x (b) x (c)] (e) List price (£) (f) Annual contract value: rooms (£000) [(d) x (e)] (g) Shops, websites (10% x above) (h) Total annual contract value (£000) [(f) + (g)] Discount factor @ 9% Total disc contract value (£000) 3,679,200 3,679 368 4,047 3,327 Note 1: A figure of 365 days has been used for all years although 366 would be strictly correct for 2012 Note 2: The 2011 list price for Mangold has been used for the full year in the interests of simplicity (the price actually changes on July 2011 – see Exhibit 9) Similarly, the 2013 list price has been used for the full year although the recent price history at Exhibit (ie changes every other year) suggests that it would increase again at July 2013 Note 3: The June 2009 / 2010 columns for Mangold show how the actual reported revenue per the accounts was achieved (including the average trade discount that was given – a figure extrapolated from data at Exhibits / 9) (b) SENSITIVITY ANALYSIS ON PRICE Longmore price would have to fall by [(3,327 – 3,056)/3,327] x 1.00 = 8p for calculations in part (a) to produce an identical outcome for both proposals This means a price of 92p for Longmore, which is slightly lower than the discounted list price for Mangold in 2011 and more significantly lower than 2012 and 2013 (97p) © The Institute of Chartered Accountants in England and Wales 2010 Page 22 of 22 JULY 2010 - KREEM LIMITED First Marking DATE CANDIDATE NO TIME MARKER NUMBER ES Req Req Req Overall TOTAL 11 12 11 42 CC SC IC ID NA Total SUPERVISOR SIGNATURE CHECKER SIGNATURE Framework ID = Insufficiently Demonstrated IC = Insufficiently Competent SC = Sufficiently Competent CC = Clearly Competent 1 or or - Range Executive summary ASSIMILATING & USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS Overview of Executive Summary Use of appropriate numbers Suitable document for the board - appropriate brief introductory paragraph - appropriate structure and style - recognises internal report - sufficient but not excessive text Revenues - Costs / EBITDA Kreem results - quality of numerical information - recognises impact of Wychdean Working Capital / cash - Comparison of contracts - quality of numerical information - explanation of assumptions and risks NPV / sensitivity - Discussion of multi-sourcing - balanced analysis of benefits and risks - appropriate consideration of ethical issues NA (CC) (SC) (IC) (ID) ID Min over Min over Min over Anything else IC SC CC (R) NA ID IC SC CC - for Summarises key findings (quality of discussion) Commentary on financial performance - revenue - costs / EBITDA - working capital / cash Commentary on contracts - NPV / sensitivity - risks to Kreem - link to strategy Commentary on multi-sourcing - benefits and risks of multi-sourcing / Tryphik - consideration of operational issues - ethical issues NA ID (CC) Min (SC) Min (IC) Min (ID) Anything else IC SC CC APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Evaluates key points Draws conclusions Impact of Wychdean evaluated On financial analysis of 2010 figures - good performance in a recession - conclusion on Retail / HCC Key costs assessed Deteriorating working capital On Longmore / Mangold - NPV marginal - gives a reasoned choice based on more than just NPVs Contracts open to negotiation Longmore projected growth / Mangold declining Longmore assumptions optimistic? On multi-sourcing - concludes on using Tryphik Justification for multi-sourcing Key operational issues re Tryphik considered (F) NA Key ethical issue evaluated Makes key recommendations ID IC SC CC Revise 2011 forecast for Wychdean Review investment in R&D (R) NA ID IC SC CC Keep working capital under control Need additional info on Longmore assumptions Investigate Tryphik / Jugson allegations Makes operational recommendations re multi-sourcing Consider other suppliers (R) NA ID IC SC CC Explain why the grades profile reflects how well the candidate has produced an executive summary CC SC IC ID NA Total REQUIREMENT - Review of Kreem's financial performance ASSIMILATING & USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS Uses relevant AI & EP information Performs relevant calculations against 2009 actuals 2010 actuals (Exh 16) - revenue £37,388k - COS £14,995k / other costs £13,999k - EBITDA £8,394k - working capital Revenue up £6.7m / 21.8% COS up 32.5% / GP calculated / other costs up 18.9% EBITDA up 10.5% / margins calculated (22.5% v 24.8%) Working capital - days / movements calculated 2009 actuals (Exh 7) - revenue £30,691k - COS £11,316k / other costs £11,777k - EBITDA £7,598k - working capital (R) NA (R) NA SC ID IC SC CC (R) NA ID IC SC Commentary on current financial position Recession - impact on retail customers - impact on hotel sector Revenue analysis - by division (Retail / HCC) - by customer (other than Wychdean) - by volume / price / discount Kreem products - mature products / product lifecycle - liq soap replaced bar soap in RPI basket (Mar 2010) Swine flu / MRSA - increased awareness of hand hygiene IC SC CC COS / GP - comment on individual COS increases v 2009 - comment on individual COS increases v forecast Other costs / EBITDA - comment on individual cost increases v 2009 - comment on individual cost differences v forecast - comment on fall in R&D from 2009 Own research - toiletries industry data - retail / hotel sector data - other published company results - ID CC Revenue - excl Wychdean up £0.9m (2.8%) v 2009 Revenue - excl Wychdean down £1.4m (4.4%) v forecast GP% - excl Wychdean or just Wychdean Trade receivable days for Wychdean (49) / or excl Wychdean Wychdean average unit price (86p) Identifies business issues (F) NA CC Performs calculations on like-for-like basis Need dashes to get IC SC Revenue up £4.4m / 13.3% COS up 25.0% / GP calculated Other costs up 9.8% EBITDA up 1.7% / margins calculated (22.5% v 25.0%) Other relevant numbers - Wychdean figures (Exh & 16) - divisional figures (Retail & HCC) - customer figures (other than Wychdean) - volumes / prices / discounts - cash £5,080k / £159k (Exh 16) ID IC Performs relevant calculations against 2010 forecasts 2010 forecast (Exh 11) - revenue £33,000k - COS £12,000k / other costs £12,750k - EBITDA £8,250k (R) NA ID Working capital - inventory significantly higher / days up - trade receivables significantly higher / days up - trade payables slightly higher / days down - comment on cash position / movement CC (R) NA (F) NA Range of relevant areas ID IC SC CC IC SC CC Depth of discussion ID APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Builds on implications of analysis - Wychdean Draws conclusions and makes recommendations First new Retail customer for some years Overall conclusion - good results - impressive in a recession / considering industry trends - working capital cycle deteriorating Not included in 2010 forecast Volume in 2nd quarter exceeds 1st quarter Could become largest customer Low profit margin / dragging overall margin down Wychdean conclusion - Wychdean has significant impact on sales - may be at expense of other customers - too much buyer power? Appears to be getting higher discounts New business impacts on trade receivables / inventory (R) NA ID IC SC CC Recognises linkages Sales mix will move more towards Retail in 2011 Divisional conclusion - Retail growth (excl Wychdean) due to price not volume - no significant change in results for HCC - decline of Mangold a concern Recommendations - revise 2011 forecast for Wychdean - review forecasts regularly - review investment in R&D / diversify product range - keep working capital under control / enforce payment dates - (R) NA (F) NA Range of relevant areas ID IC SC CC SC CC Depth of discussion ID IC Divisions may be affected differently by recession Recent price rises may reduce demand Higher packaging costs may be due to problems with Jugson Increase in advertising good value for money? Increased inventory days but long shelf-life Trade payables days includes relevant other costs Are payable days consistent with supplier policy / ethics? (R) NA ID IC SC CC Explain why the grades profile reflects how well the candidate has reviewed the financial performance CC SC IC ID NA Total 11 REQUIREMENT - Comparison of Longmore and Mangold contracts ASSIMILATING AND USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS Uses relevant AI & EP information NPV for Longmore contract Longmore contract terms (Exh 17) - list price £1.00 - non-replacement 20% - website / shop sales 10% Figures over years (£766k, £1,051k, £1,861k) Website & shop (10%) adjustment Uses correct discount factors (0.917, 0.842, 0.772) NPV = £3,327k (or GP% thereof) Longmore revenue for 2011 - 2013 (Exh 17) - rooms (3,750, 4,500, 7,500) - occupancy rate (70%, 80%, 85%) (R) NA ID IC SC CC NPV for Mangold contract Volume over years (1,281k each year) / total 3,843k Uses appropriate contract prices (£1.02 - £1.10) Trade discount adjustment (10% - 12%) OR - Alternative method - 2% annual decline in revenue Uses correct discount factors (0.917, 0.842, 0.772) NPV in the range £3.0m - £3.2m (or GP% thereof) Mangold contract terms (Exh 9) - list price (£1.02 / £1.10) - trade discount (10% - 12%) Mangold revenue for 2011 - 2013 (Exh 9) - rooms (5,400 each year) - occupancy rate (65% each year) (R) NA General industry figures - 5% website increment (Exh 5) - 65% occupancy rate (Exh 13b) ID IC SC CC Sensitivity calculations Attempts a sensitivity calculation Uses difference between NPVs Calculates relevant % change in NPV Applies to price / converts to price change in pence (R) NA Need dashes to get ID IC SC CC (R) NA ID IC SC CC Identifies business issues Commentary on analysis Impact of recession on UK occupancy rates Sensitivity commentary - difference in NPV marginal - Longmore price is opening bid so should be minimum - Mangold unlikely to accept price increase - considers other sensitivity variables Kreem wants to expand into Europe (Exh 5) Hotel industry expansion plans being curtailed (Exh 13b) Importance of green issues to consumers Comparative risks to Kreem - Longmore much more uncertain assumptions - main benefit not until 2013 - familiar with Mangold Own research relating to assumptions Link to strategy - Longmore fits with green policy (non-replacement / refillables) - Longmore expansion into Europe may aid Kreem plans (R) NA ID IC SC CC (F) NA ID IC SC CC APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Evaluates options Draws conclusions Conflict of interest may be negotiable Concludes on Longmore - more realistic assumptions may reduce NPV - keen to a deal as Longmore approached Kreem - more profitable company than Mangold Price to Longmore may be negotiable over contract term Kreem's revenue from Longmore projected to grow Kreem's revenue from Mangold declining Good time to review Mangold as contract up for renewal (R) NA ID IC SC CC Concludes on Mangold - weakening financial performance - Mangold may look to cut costs - Mangold may not renew contract Concludes on sensitivity - price not the most important factor - suggest other variable which would change result Demonstrates professional scepticism on assumptions Room numbers / occupancy rates - Longmore hotel expansion plans look optimistic - Longmore occupancy rates look optimistic - Mangold rates in line with industry averages Longmore refurbishment and rebranding - may fail to bring new business (like Regalia) - could take longer than expected - could delay Longmore growth / Kreem revenue Concludes on comparison / selects an option - gives a reasoned choice based on more than just NPVs (R) NA (F) NA Range of relevant areas ID IC SC CC SC CC Depth of discussion ID IC Makes practical commercial recommendations Need additional info on assumptions / uncertainties Revenue from website and shops - Longmore's 10% estimate above 5% industry experience - Mangold contract does not include this revenue stream Discuss public washroom / refillables with both Assess 20% non-replacement factor for both Set-up and transition costs - change to Longmore will incur new set-up costs - packaging needs to be redesigned - general disruption / management time (R) NA (F) NA Discuss website / shop sales with Mangold Consider practicalities / logistics of supplying Longmore Range of relevant areas ID IC SC CC SC CC Depth of discussion ID IC (R) NA ID IC SC CC Explain why the grades profile reflects how well the candidate has analysed the two options CC SC IC ID NA Total 12 REQUIREMENT - Discussion of multi-sourcing for packaging supplies ASSIMILATING & USING INFORMATION STRUCTURING PROBLEMS & SOLUTIONS Uses AI & EP effectively Produces relevant analysis - benefits of multi-sourcing Strategy of expanding into Europe (Exh 5) Reduces reliance on a single supplier Supplier code of conduct (Exh 10) Ensures continuity of supply / protects against supplier failure 10-point supplier criteria list (Exh 12) Provides flexibility of supply Operational problems with Jugson (Exh 12) Competition between suppliers may improve quality Quotes from Tryphik customers (Exh 18) Competition between suppliers may reduce price Transfer of jobs / animal testing / bribery (Exh 19) Could accommodate Kreem's expansion plans Product label (Exh 14) (R) NA ID IC SC CC (R) NA ID IC SC CC Describes wider context Produces relevant analysis - risks of multi-sourcing Packaging is key link to consumers New supplier would mean set-up costs Euro exchange rate Increased management time Kreem's experience of supplier changes (Exh 5) Splitting contract may mean loss of economies of scale / bulk discounts Importance of green issues to consumers Inconsistent quality / specification Own research on multi-sourcing (eg P&G) Relationships may be less strong / Kreem not a major customer Increased complexity / ongoing logistical complications Greater potential for reputational damage by association (R) NA ID IC SC CC (R) NA ID IC SC CC Produces relevant analysis - transfer to Tryphik Jugson has not been providing good service Jugson's plans for Asia / cosmetics not beneficial for Kreem Packaging costs have increased, may be due to Jugson issues Tryphik experienced / committed to toiletries sector Flexible about working hours Sufficient capacity / design processes Tryphik not familiar with Kreem / Klingley / Oloros Tryphik may be expensive (per another customer) May impact on "Made in UK" label (R) NA ID IC SC CC APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Evaluates operational aspects of overseas supplier Makes practical commercial recommendations Trade in euro - means forex risk - may require IT upgrade Recommendation on multi-sourcing - need to ensure consistent standards across suppliers - consider other areas of business for multi-sourcing Located in France - increased transport costs / times - increased risk of interruption of delivery - potential cost saving from direct delivery to Xanthus - less easy to monitor quality Communications - language / cultural issues may cause difficulties Legal issues - French regulations - French sales tax / possible subsidies (R) NA (F) NA Recommendations on operational issues - resolve operational problems with Jugson - consider hedging / treasury function - consider if there is a suitable alternative UK supplier - employ French speaker - investigate French regulations Range of relevant areas ID IC Recommendation on using Tryphik - review against 10-point criteria list - understand why "no stranger to controversy" - negotiate terms of SLA - consider other suppliers as well - may fit better with move to Longmore SC CC SC CC Depth of discussion ID IC Uses professional experience to consider ethical issues Klingley substitution of raw material / inaccurate labelling - potential hazard for customers - breach of EU regulations Kreem claims green credentials - no longer wholly UK sourced / carbon footprint - Tryphik fits green ethos (recycling / bio-degradable) - using Tryphik may involve changing label Recommendation on ethical considerations - ensure suppliers meet all regulatory requirements - verify Tryphik's green / ethical credentials - manage PR re potential UK job losses - investigate facts of alleged animal testing - establish whether Kreem staff involved with Jugson bribes (R) NA (F) NA Range of relevant areas ID IC SC CC SC CC Depth of discussion ID IC Kreem proposal affects UK employment - not in line with Kreem's corporate responsibility policy - may be adverse media comment - but not necessarily a big issue for Kreem / customers Allegations of animal testing link to Tryphik - illegal in EU - danger of guilt by association / Tryphik may not be ethical Jugson allegedly made bribes - unethical method of conducting business - not in line with Kreem's code of conduct (R) NA (F) NA Range of relevant areas ID IC SC CC SC CC Depth of discussion ID IC Explain why the grades profile reflects how well the candidate has analysed multi-sourcing issue CC SC IC ID NA Total 11 Overall paper APPLYING JUDGEMENT CONCLUSIONS AND RECOMMENDATIONS Structure and style Meeting the requirements Suitable style Requirement - logical flow / not repetitive - analysis on like-for-like basis - clear structure within sections - no major omissions - sufficient but not excessive headings - figures clearly derived Suitable language for audience Requirement - formal language / appropriate jargon - uses NPV and relevant sensitivity - written in sentences and paragraphs / not notes and bullets - discusses risksand assumptions - legible / spelling - recommends an option Appropriate appendices Requirement - clear calculations / easy to follow - coherent argument linked to scenario - assumptions clearly set out / no excessive text - no major omissions - calculations used / referred to in report - appropriate response to ethical issues NA (CC) (SC) (IC) (ID) ID Min over Min over Min over Anything else IC SC CC NA (CC) (SC) (IC) (ID) ID IC SC CC Min over Min over Min over Anything else CC SC IC ID NA Total .. .CASE STUDY – JULY 2010 PART 1: EXECUTIVE SUMMARY Introduction This report covers the July 2010 Case Study (CS) exam It is issued in conjunction with... Chartered Accountants in England and Wales 2010 Page of 22 CASE STUDY – JULY 2010 PART 2: THE CASE STUDY EXAMINATION Scenario for the paper (Advance Information) The case relates to Kreem Ltd (Kreem),... downturn, but only modest growth is expected in 2010 © The Institute of Chartered Accountants in England and Wales 2010 Page of 22 CASE STUDY – JULY 2010 • • • • • • • • • • • Faced by more competition,