FIRST ILLUSTRATIVE SCRIPT AND EXAMINERS’ COMMENTS The commentary below follows the order and numbering of the script, with reference to the topics in the marking key It should be read in conjunction with the review of the Second Illustrative Script and full Examiners’ Report for this session Examiners’ comments – overview This script was well within the top 25% of all assessed scripts It is a clearly-presented report dealing with many of the key issues, offering sound commercial advice where applicable, and of about average length A particularly impressive feature is its ability to link different parts of the case material together Good grades were earned for the executive summary and for all three main topics, as well as across the four areas of Professional Skills The candidate went a long way towards success by the simple technique of dealing with all the main components of Requirement (including working capital) and Requirement (including sensitivity analysis) All areas of Requirement were also tackled but coverage of ethics was quite brief Terms of reference and executive summary After brief and appropriate terms of reference, the executive summary begins with a good overview of the company’s current situation, neatly linked to the three case requirements It then goes on to deal with each requirement in turn, admirably serving the purpose of distilling the key issues and drawing the audience into the report itself – just what an executive summary is supposed to It addresses the main points covered in the body of the report, restating the key figures from Requirements and and principal recommendations from Requirement It is longer than the recommended 10% of the total script, but not unduly so For Requirement 1, the principal revenue and cost comparisons are included, adjusted where necessary to show like-for-like performance The candidate makes a sensible reference to the impact of price rises on both revenue and costs, but the mention of discounts in connection with costs is flawed as they are treated in Kreem’s accounts as a deduction from revenue (see also Requirement below) The analysis of the cash position is brief but very much to the point (“good but deteriorating”), as is the conclusion that Kreem should not become too dependent on Wychdean Under Requirement 2, the candidate starts by summarising the outcome of his/her calculation This could have been linked better to the comments that follow so as to make clear that other factors have to be considered because the financial result is so marginal A particularly valid point here is that, while the Longmore figures may be overstated, the Mangold ones might at the same time be understated – a sort of reverse professional scepticism In common with many other scripts, there is the suggestion to carry out due diligence on Longmore, although this candidate does at least explain what (s)he means by the phrase rather than just using it glibly The coverage of Requirement is briefest (consistent with the attention given to it in the main body of the report) It still captures the report’s principal findings in a suitably crisp style but, as noted above, there is no mention of the ethical issues arising As there are marks available for ethics under each of the four skills headings, this has resulted in a lower set of grades than would otherwise have been obtained for the executive summary Analysis of Kreem’s financial performance [Requirement 1] This part of the report achieved a large number of competent grades, suffering only through its relatively terse coverage of working capital It is set out clearly with an introduction and then a section dealing in turn with each of the main captions from the exam requirements It gives due emphasis to Wychdean, making judicious reference to industry issues where relevant © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 Most candidates who start each section of their report with an introduction add little value, but this one sets the context helpfully, alluding in a succinct third sentence to three relevant external issues, revealing that the AI has been studied carefully and that the candidate has made the effort to become steeped in the key developments affecting toiletries The commentary on the figures deals with most of the essential features: comparison with both prior year and forecasts; like-for-like analysis; sales volumes; price rises; and divisions These are brought together in a flowing discussion – which could, however, have been enhanced by some further explanation (eg for the rise in sales volume, linked to pricing movements), mention of customers other than Wychdean and recognition that some of the Wychdean revenue may be at the expense of other customers The candidate could also have discussed overall results on a like-for-like basis, rather than limiting the like-for-like comparison to the Retail division on its own The candidate then goes on to look at the main cost headings However, the passage on cost of sales is disappointing on two counts: it does not provide figures for individual captions, and the long explanation about discounts is misguided since they are a treated in the accounts as a deduction from revenue rather than a cost The coverage of other costs is much fuller (although the logic of “most of our costs are variable as a result of the extensive outsourcing” is unclear), not least in identifying the two principal items – namely, R&D and advertising The explanation for advertising is excellent, both in recognising (unlike the majority of candidates) the impact of the World Cup’s timing on Kreem’s figures and in echoing John Wanamaker’s comment on the effectiveness of advertising (AI, p18) The sentence on EBITDA is too brief, not going far enough to assess the combined impact of movements in revenue and costs The section on working capital focuses on Kreem’s cash position (an area omitted by many candidates) but refers to only one of the three main individual accounts figures (trade payables) A comment on receivables and how they have been affected by Wychdean would have been helpful Without this detailed coverage, the mention of ‘overtrading’ lacks a sound basis Finally, the candidate concludes by recapping on the main points Overtrading is mentioned again and here the context is much clearer: the candidate cleverly connects the income statement, balance sheet and commercial reality of the brand in a single sentence – the sort of linkage that only the best candidates are able to make Evaluation of proposals [Requirement 2] This was another very good section, again achieving a large number of CC and SC grades Here too, the candidate begins with an overview before going on to summarise the results of his/her calculations, making the immediate point that the outcomes are close and thus other factors have to be considered The first of these – the relative growth in profits from the two customers – was missed by many candidates There follows a good paragraph on sensitivity analysis, which again starts with the key figures and then goes on to rationalise the possibility of higher prices by reference to Kreem’s 2010 results This is superficially another good piece of linkage, but it fails to recognise that discounts given to HCC customers, and Mangold in particular, have been considerably higher in 2010 The script then goes on to comment on the assumptions underlying several other variables – room numbers, occupancy rates, website revenue and the 9% discount factor, as well as profit margin: very few others among those who used the profit method stood back to wonder whether the existing HCC margin might not be valid for Longmore The candidate also legitimately raises the question why Longmore’s current supplier is not re-tendering: this could suggest reasons (eg issues of quality, price or reputation) why Kreem would not want Longmore as a customer The next section, on risks, once more manages to make a large number of relevant points in a concise piece of writing – notably the risk that the estimated closure time for rooms in Longmore will be longer than anticipated, a consideration overlooked by many candidates © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 Finally, the candidate weighs up the pros and cons of the two customers in a conclusion before going on to recommend Longmore and to make a series of other recommendations, though these could have been more extensive to cover some of the practical issues (eg logistics of supplying Longmore, inclusion of public washrooms in the contract) Discussion of diversification of packaging supplies [Requirement 3] As noted earlier, this was the weakest of the three main sections (though still gaining over 50% of competent grades) The candidate has produced a reasonable discussion of the wider strategic and operational issues, but coverage of ethics is disappointing It less well structured than the earlier sections, for example by including new points in its conclusion and recommendations More use could have been made of the background business issues (eg importance of packaging to the overall Kreem product and ‘green’ preferences among consumers) As for requirements and 2, the main discussion is preceded by an overview In this case, it does not add much to the script other than in recognising the ongoing problems with Jugson In looking at the general benefits and risks of multi-sourcing, the candidate identifies most of the key points (eg impact of competition between suppliers and relationship strengths / weaknesses) However, there is an absence here of some of the joined-up thinking that characterises the earlier sections; for example, the candidate could have commented on the link between the Jugson problem and higher packaging costs, or the need for good relationships between the packaging supplier and other companies along Kreem’s supply chain Perhaps the most astute comment here is: “We will need to incorporate SLAs which protect our intellectual property – Tryphik has long-term contracts with large multinationals, which may present a familiarity risk and pressure to disclose confidential information” Few appreciated the importance of intellectual property despite several mentions in the AI (pp 16, 17, 41) With regard to operational aspects, the candidate achieves good grades by referring to forex risk, language / cultural issues and regulation, but could have made more of the French location by discussing transport costs and the risks of interruption in supply In the area of ethics, the candidate writes briefly about overseas employment, animal testing and Tryphik’s environmental “fit” with Kreem but makes no mention of the labelling risks (AI, Exhibit 13c) In general, the points are not sufficiently developed to earn good AJ grades The section ends with a good range of recommendations on the choice of Tryphik and on both operational and ethical aspects – albeit interspersed with comments about Tryphik that should have been made in previous paragraphs eg “they are expensive their software is unreliable” Overall paper The script is generally well written Overall, other than partly in relation to working capital at Requirement and ethics at Requirement 3, it has met the requirements, is well balanced across the main topics and demonstrates good understanding of the case scenario Appendices The candidate has included three Appendices: • • • Appendix (comparison of 2010 performance with 2009 actuals and 2010 forecasts) Appendix (analysis of the two hotel proposals – net present value calculation) Appendix (sensitivity analysis) Appendix tabulates the key figures used for Requirement It is briefer than Appendix in many scripts On the one hand, this means that time has not been wasted on irrelevant items; on the other, some further analysis (eg revenue by customer, movements in the components of cost of sales) would have enhanced both the Appendix itself and the main report © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 Appendix sets out clearly the key calculations for Mangold and Longmore, with workings to show how figures have been derived and what assumptions have been made This is followed by the sensitivity analysis at Appendix 3, which is less clear: the candidate appears to adopt a ‘trial and error’ method and also does not explain where the figure of 95p comes from © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 ILLUSTRATIVE SCRIPT DRAFT REPORT TO THE BOARD OF DIRECTORS OF KREEM LTD JULY 2010 © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 Terms of reference The purpose of this report is to analyse Kreem’s performance in 2010, compare the Mangold and Longmore contract options, and discuss the potential to multi-source our packaging The report has been prepared as a draft solely for the Board of Directors of Kreem Ltd It contains sensitive and confidential information and is intended for internal use only Executive summary Kreem is an established brand in the toiletries industry which has seen impressive growth in previous years despite the economic climate and competitive environment 2010 has seen many changes, including a new customer, Wychdean The effect of these changes on Kreem’s performance for 2010 is calculated in appendix and discussed in part The contract for Mangold, one of our HCC customers, is up for renewal at the end of 2010, which offers the opportunity to continue to trade with them or to pursue other customers previously unavailable due to contractual restrictions by Mangold We have been approached by Longmore, one of Mangold’s competitors, with a proposal to supply to them for the next years Appendix and calculate the potential profits available from renewing Mangold or accepting the Longmore proposal Regarding supply, we have encountered some issues with Jugson, our packaging supplier, and in general are considering a strategic move towards multi-sourcing Tryphik is an alternative supplier which is discussed in part 3, with a view to transferring part of the packaging requirements to them Financial performance for year to 30 June 2010 Overall revenue achieved was £37.4m, up 21.8% on prior year, due to additional revenues from Wychdean Like-for-like retail revenue is up 2.2% to £24.8m, behind forecasts by 5.5%, whereas HCC revenue was up 5.1% on 2009 to £6.8m, in line with forecasts This suggests the retail industry is suffering more than we expected from the recession, and that the price increase this year may have adversely affected retail sales, whereas the price increase did not appear to affect HCC sales volume adversely Cost of sales (up 32.5% to £3.7m) and other costs (up 18.9% to £14.0m) are up on 2009 and forecasts, suggesting price increases, pressures on our margins and higher discounts than previously EBITDA is up £796k to £8.4m, which despite the adverse cost movements is impressive The cash position is good but deteriorating so this must be closely controlled along with other forecasts Overall a good performance, although we must ensure we not become overly reliant on Wychdean Comparison of Longmore and Mangold The Longmore contract would generate slightly more profit than Mangold renewal: £2.08 million versus £1.99 million Other factors include the growth potential from Longmore’s UK and overseas expansion We must consider the fact that Longmore’s figures are entirely unvalidated, and Mangold’s are entirely historic without considering future growth strategies The Longmore contract is recommended given the long-term growth potential available However, prior to accepting, Longmore’s past performance and forecasts should be subject to due diligence, to ensure its figures are reliable and sustainable Discussion of diversifying packaging Multi-sourcing has many benefits and risks: it might be cheaper; quality could improve but equally deteriorate; relationships may not be as good Additionally, there are many risks over use of an overseas supplier – namely compliance, cultural and language differences and currency risk As a result Tryphik does not appear to be the best supplier to enter into a multi-sourcing arrangement with at present and other suppliers should be considered However multi-sourcing should still be pursued because the benefits outweigh the risks © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 An analysis of the company’s performance for the year to 30 June 2010 Kreem achieved impressive growth in a difficult economic environment and highly competitive market from 2008 to 2009, with revenue growth of 11% and bottom line profit growth of 20% 2010 has seen some major changes for Kreem, most notably the win of our first supermarket customer, Wychdean, in January 2010 Other key issues affecting Kreem have been the decline in the hotel and tourism industry, and the increasing threat of consumers “trading down” to lower cost products, and the rise of own brand product ranges Please see appendix for calculations supporting this section of the report Revenue Overall, revenue is up £6,697k (21.8%) on 2009 actuals to £37,388k The growth is due to Wychdean sales of £5,835k, which is the main driving factor for the growth and demonstrates the importance of this new customer to Kreem’s sales figures, especially considering it constitutes only months’ sales Like-for-like revenue for the Retail division is up £533k (2.2%) to £24,760k, and down £1,440k (5.5%) on forecasts This is disappointing as we had hoped that Retail would survive the recession with minimal impact given our products are considered necessities The minimal growth on 2009 could be in reaction to our price rise this year, as price increasingly becomes the most significant factor which consumers base their choice of toiletries’ products on Alternatively, it could suggest that products have reached their peak in their life cycles, and are approaching the decline stage Revenue for the HCC division was up £329k (5.1%) to £6,793k on 2009, and in line with forecast This is positive and indicates that our HCC revenue is less susceptible to price increases, and that the hotel industry (or the higher end of the hotel industry at least) has not been as adversely affected by the economic downturn as first thought Sales volume is up 15% on prior year figures to 41,596 units Cost of sales Cost of sales is up £3,679k (32.5%) on 2009 to £14,995k It is also 25% above the forecast Although we expected cost of sales to rise as a result of the Wychdean contract, the fact that it has grown disproportionately to revenue suggests bigger raw material costs or that bigger discounts are being given on the list prices It is likely that Wychdean is wielding its power over us by demanding higher than average discounts We must monitor these discounts to ensure it is not putting excessive pressure on our margins Other costs Other costs are up £2,222k (18.9%) on 2009 to £13,999k It is almost in line with revenue, indicating that most of our costs are variable as a result of the extensive outsourcing R & D is down £665k (53.8%) on 2009 to £571k This is not far off our forecast, but indicates a fall in product development at a point where our current products’ growth is beginning to slow down Advertising revenue is up £1,107k (38.8%) on 2009 to £3,959k, and is up on forecast 16.4% The World Cup 2010 campaign took place partly in this financial year, the benefits of which have not fully been reaped in these figures Even so, advertising is high so we must ensure these expensive campaigns are actually translating into sales growth and increased brand awareness © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 EBITDA EBITDA is up £796k (10.5%) on 2009 to £8,394k Whilst 10% growth is impressive, it is low compared to our revenue growth Changes in working capital The cash balance is at £5,080k and is still healthy despite increased trading and pressure on our working capital cycle from Wychdean Our trade payable days have fallen from 111.9 to 101.7 days, which is not ideal but an improvement on 2009 Net cash flow from operating activities is down 26% to £5,917k It indicates dangers of overtrading and we should monitor and forecast cash flow closely to ensure cash is at a sufficient level to meet our loan repayments Conclusion and recommendations 2010 has seen impressive revenue growth of 22% on 2009 and EBITDA is also up 10% This is excellent given recent economic conditions and concerns over our sales figures, and we have even managed to increase prices during this period However, margins are down and cash flow is also suffering, which is an indicator that although sales are increasing, we should monitor our working capital and performance closely to prevent overtrading and in particular damage to our brand Key recommendations include forecasting both our income statement and cash flow with regular reviews, and performing market research on the effect of our advertising campaigns to ensure we are getting the most out of these We should also benchmark our performance against competitors’ to ensure our results are in line with or better than the industry A comparison between the Longmore proposal and renewal of the Mangold contract The Mangold contract is due to expire at the end of 2010, which gives Kreem the opportunity to review the contract and consider whether entering into a contract with one of Mangold’s competitors, previously unavailable due to a contractual clause, would be a more attractive option We have not yet begun negotiations on the Mangold renewal and have recently been approached by Longmore, one of their competitors, to consider a 3-year contract to supply them The calculation in appendix compares the two options by considering the expected profit to be generated by the two customers, discounted to its value to Kreem today Based on the figures provided by Edwina Michaels of Longmore and on our prior knowledge of Mangold, the Longmore contract would generate more profit than Mangold - £2.08 million compared to £1.99 million The variance, however, is low so other factors should be considered Firstly, the Longmore contract’s profits are more variable (growing throughout), whereas Mangold’s profits are expected to be constant Mangold provides a more stable profit base, but Longmore offers more opportunity for growth A sensitivity analysis was performed on the sales price (appendix 3) and demonstrated that just a 3% increase in sales price to Mangold would result in higher NPV (Net Present Value) Given that HCC is less susceptible to price increases as demonstrated in our 2010 figures, we could consider further price increases than planned On the other hand, we may be able to negotiate price increases with Longmore, too © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 Assumptions We must remember that the calculation in appendix is an estimation: Longmore’s figures are unsubstantiated estimates which may have been boosted to look more attractive, and may not be based on reliable calculations Mangold’s figures on the other hand are based purely on the historical and not consider any future growth, in rooms or occupancy The Longmore margin is likely to differ from the average given the different sales price, cost of new branding and sales and distribution The additional revenue estimate at 10% is highly subjective and again not substantiated The investment appraisal at 9% may not be appropriate – a risk factor should perhaps be worked into the Longmore NPV given it is unknown to Kreem It would be interesting to find out why the previous supplier will not be re-tendering, as this may reveal key information on Longmore Risks Longmore’s expansion plans are risky during the current climate and have been proven to be unsuccessful for another hotel chain, Regan (now Regalia) There is a risk that the estimated closure time for rooms will be longer than anticipated, directly affecting our sales volume Mangold, although a known customer, has seen revenue and profits decline in recent years and the sales may continue to decline (rather than stay constant as estimated) There is also a risk (although we should consider the environmental benefit) of Mangold changing their replacement policy in the rooms, which would reduce sales volume significantly Conclusion Mangold is a safer option given that we have an existing relationship and have experienced a fairly regular revenue stream from them in the last years Longmore is more risky because it is unknown and because of the expansion plans On the other hand, it is more environmentally friendly, and offers significant potential growth, both in the UK and abroad Recommendations Longmore is the recommended option because of the future potential growth and the alternative revenue options Before accepting the proposal there are several recommendations: - consider proposing an incremental price increase to cover rising costs - perform due diligence work on Longmore’s past and forecasted performance - ensure Longmore meets our investment appraisal criteria - perform ethics checks to ensure a good “fit” with our ethical priorities Discussion of the proposal to diversify packaging supplies During 2010 we have encountered certain issues with our packaging designer and manufacturer, Jugson, which have impacted quality and threatened supply We are also becoming increasingly aware of the risks related to a single source for each outsourced function Despite our policy to date of having just one supplier for each function, we are considering the possibilities of multi-sourcing and have started investigating alternative sources for our packaging supplies © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 General benefits and risks of multi-sourcing Using multiple sources could be cheaper if suppliers compete over price, and there may be more emphasis on quality It will reduce our reliance on current suppliers, which means if we have operational problems in future, or if one of our suppliers goes into liquidation, we will have an alternative The suppliers themselves may be better, resulting in higher quality packaging It also offers expansion potential: using a supplier with branches or based abroad will facilitate overseas expansion There are also various risks of multi-sourcing There is higher risk of reputation damage, as more parties are involved in maintaining and protecting the Kreem brand Relationships with new suppliers may take time to build, and existing relationships may be strained as a result of alternative suppliers being used Logistically it will be more difficult to co-ordinate and will require more management time Quality may be affected, or packaging could turn out different from different suppliers Operational aspects and ethical issues Given the supplier is based abroad, we will need to ensure they comply with UK regulations Given they already supply to multinationals, this should not be an issue We will need to incorporate SLAs which protect our intellectual property – Tryphik has long-term contracts with large multinationals, which may present a familiarity risk and pressure to disclose confidential information We will need to change our packaging wording from “made in the UK” There are potential repercussions of moving supply abroad as experienced by Ellis Ltd which we will need to take steps to limit – for example by investing in a local community employment initiative The cultural differences and language barrier present risks to the packaging quality which could be managed by recruiting someone with experience of the French market This could also help facilitate future sales expansion to France Tryphik’s reported knowledge of Merjoram’s annual testing is unethical and we should seek to discover Tryphik’s ethical standpoint, and if it fits with our environmental and recycling requirements There is also the big issue of currency risk which will need to be managed – possibility through the creation of a Treasury department, to manage hedging Conclusion and recommendations Tryphik may offer better quality service than we have recently experienced with Jugson, as well as offering a way into overseas expansion However, reports that they are expensive, that their software is unreliable, added to the cultural differences and currency risk, make Tryphik a less attractive option The initial recommendation is that there may be a more suitable packaging supplier than Tryphik, and we should continue investigating If there are no other potential suppliers we should perform supplier due diligence and consider our forex strategy As it stands, Tryphik would be a good supplier to use in 2-3 years when we have commenced sales abroad, so we can match euro sales and costs © The Institute of Chartered Accountants in England and Wales 2010 Page 10 of 13 Appendix Year ended 30/06/10 actuals Revenue Overall growth Compared to 30/06/09 actuals Compared to 30/06/10 forecast 37,388 up 6,697 21.8% Like-for-like (excluding Wychdean) 31,553 up 862 2.8% down 1,447 – 44% Like-for-like by division 24,760 up 533 down 1,440 2.2% – 5.5% down – 0.1% - Retail - HCC Sales volume up 4,338 13.1% 6,793 up 329 5.1% 41,596 up 5,425 15.0% 14,995 up 3,679 32.5% up 2,995 25.0% 13,999 up 2,222 18.9% up 1,249 9.8% down 665 53.8% up 71 14.2% up up 559 16.4% Cost of sales Overall Other costs Overall R&D 571 Advertising 3,959 30/06/10 actuals 1,107 38.8% vs 30/06/09 EBITDA 8,394 Net cash flow from operating activities 5,917 Cash 5,080 up 159 3.2% Trade receivables 7,535 up 1,987 35.8% Trade payables 4,179 up 710 20.5% Trade receivable days Trade payable days up 796 10.5% down 2,092 26.1% 73.6 66.0 101.7 111.9 vs forecast up 144 1.7% N/A Not available All figures in £’000 unless stated © The Institute of Chartered Accountants in England and Wales 2010 Page 11 of 13 Appendix Net present value calculation Year ending 30/06/11 Longmore 30/06/12 30/06/13 30/06/11 Mangold 30/06/12 30/06/13 1,165,847 1,255,527 1,255,527 Revenue from hospitality packs 766,500 1,051,200 1,752,000 Additional revenue (2.2) Total 76,650 843,150 105,120 1,156,320 175,200 1,927,200 Gross profit (2.3) 541,302 742,357 1,237,262 748,474 806,048 806,048 0.917 0.842 0.772 0.917 0.842 0.772 496,374 625,065 955,166 686,351 678,692 622,269 Discount factor (2.4) Present values NPV (net present value) £2,076,605 £1,987,312 2.1 Longmore revenue 2011 bedrooms = 3,750 occupancy = 70% Revenue = £1.00 x ((3,750 x 70% x 365) x 80%) = £766,500 2012 bedrooms = 4,500 occupancy = 80% Revenue = £1.00 x ((4,500 x 80% x 365) x 80%) = £1,051,200 2013 bedrooms = 7,500 Revenue = £1.00 x ((7,800 x 80% x 365) x 80%) = £1,752,000 occupancy = 80% Reduction in revenue due to non-replacement assumed constant at 20% Mangold revenue 2011 List price = £1.02 Discount 11% (assumed as average of normal HCC discounts) Actual price £0.91 Rooms = 5,400 (throughout) Occupancy = 65% (assumed constant throughout, as per previous year) Revenue = £0.91 x (365 x 65% x 5,400) = £1,165,847 2012/13 List price = £1.10 Discount = 11% Actual price = £0.98 Revenue = £0.98 x (365 x 65% x 5,400) = £1,255,527 pa © The Institute of Chartered Accountants in England and Wales 2010 Page 12 of 13 2.2 Additional revenue – calculated at 10% as per email from Edwina Michaels 2.3 Gross profit assumed at 64.2% - in line with 2010 HCC margin achieved 2.4 Discount factor of 9% used; using following equation 1/1.09n (n = years) Appendix Sensitivity analysis Difference between NPVs Equivalent to increase present value of approximately Sales volume for Mangold = = £89,293 /3 = £29,764 pa 5,400 x 65% x 365 = 1,281,150 units If Mangold increased prices by 3p and margins remained constant, additional gross profit would be generated of: 1,281,150 x 3p = £38,435 pa This would result in Mangold’s NPV exceeding Longmore’s and represents an increase of approximately 3% (3p / 95p) in price © The Institute of Chartered Accountants in England and Wales 2010 Page 13 of 13 ... and Wales 2 010 Page 11 of 13 Appendix Net present value calculation Year ending 30/06 /11 Longmore 30/06 /12 30/06 /13 30/06 /11 Mangold 30/06 /12 30/06 /13 1, 165,847 1, 255,527 1, 255,527 Revenue from... 766,500 1, 0 51, 200 1, 752,000 Additional revenue (2.2) Total 76,650 843 ,15 0 10 5 ,12 0 1, 156,320 17 5,200 1, 927,200 Gross profit (2.3) 5 41, 302 742,357 1, 237,262 748,474 806,048 806,048 0. 917 0.842... and Wales 2 010 Page of 13 ILLUSTRATIVE SCRIPT DRAFT REPORT TO THE BOARD OF DIRECTORS OF KREEM LTD JULY 2 010 © The Institute of Chartered Accountants in England and Wales 2 010 Page of 13 Terms