Case study november 2010 illustrative script 1 ICAEW

FIRST ILLUSTRATIVE SCRIPT AND EXAMINERS’ COMMENTS In the commentary below extracts from the scripts are shown in italics; spelling, grammar, sentence construction and punctuation from the original script have been retained The commentary follows the order and numbering of the script with references to the topics in the marking key It should be read in conjunction with the review of the Second Illustrative Script and also the full Examiners’ Report for this session Examiners’ comments – overview This script achieved a pass near the top of the 2nd quartile It is slightly shorter than average length (but as always this depends on the actual handwriting), but addresses all the key issues and contained some strong sections In terms of professional skills this candidate achieved overall competent grades – Clearly Competent (CC) and Sufficiently Competent (SC) – in out of grade boxes for Assimilating and Using Information; in out of 14 for Structuring Problems and Solutions; out of 11 for Applying Judgement and out of 10 for Conclusions and Recommendations The original 19 -page length of the manuscript version was broken down as follows     Cover and contents – page Executive summary – pages Report (main body) – 11 pages Appendices/workings – pages The 11 pages of the main body of the report address the key issues and together with the appropriate appendices demonstrate good planning and a good balance in answering the main requirements This candidate achieved a good majority of the competent grades in Executive Summary and Requirement (financial analysis) and a majority of competent grades in both Requirement (review of Australian project) and Requirement (strategic review) Terms of reference and executive summary The report does not have a terms of reference section but starts by stating the purpose of the report in a short opening paragraph at the beginning of the executive summary The remainder of the executive summary is well structured with clear headings to sections and covers all three areas of the report – there was evidence of some good planning in compiling this summary, despite it being the last section to have been completed, The pages of the executive summary are split fairly evenly between the three main topics The summary of the financial analysis of EEE’s management accounts contains some of the appropriate numerical analysis, both absolute figures and percentages, and also includes a brief, relevant mention of the cash position In the section dealing with the proposal to expand into Australia, the report summarises the key financial calculation with a caution about the numbers – particularly the fixed costs – together with a brief review of the opportunities and threats Similarly in the strategic review section the candidate presents a summary of the benefits and risks and brings in some of the ethical issues and possible solutions Overall the executive summary covered all areas and was sufficiently competent in the use of numbers and clearly competent on the quality of discussion It was similarly competent on judgement and conclusions but weaker on recommendations To score better grades on this section, the candidate could have provided more recommendations for EEE’s business development © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 Review of EEE’s 2010 financial performance [Requirement 1] The financial statement analysis in this section is accompanied by three appendices (see detailed commentary below) Appendix supports the comparative analysis of revenues, including sales mix, and is a clear relevant appendix Appendix looks at the analysis of gross profit in detail: analyses the business activities and overall results in both percentage and absolute terms – it is a thorough piece of work Appendix analyses the operating profit percentage and develops the analysis These are good relevant appendices from which the report can be written The review starts with a brief introduction then, as specified in the requirement, moves to an appropriate analysis of revenues comparing 2010 against 2009 The analysis starts with the overall position of decline and then gives details of the business activities The analysis is both in absolute and percentage terms and provides relevant commentary on the numerical work “Commission revenue has decreased by 45% (App 1) to just £1,354k, as only 6,770 contracts were signed during the year, compared to 12,520 in 2009 This brings the total contracts up to 53,295 during the project (and this is nearly 90% of the total estimated market at the beginning of the project.) Therefore this revenue stream will produce very little going forward and we recommend looking at alternative revenues” Similarly, by providing an analysis of gross profit changes both in absolute numbers and percentage terms, it provides an essential context for the reader “The total gross profit for the year has decreased by 16.4% from £4,005k in 2009 to £3,347k in 2010 Although the absolute figure has gone done however, the margin has increased from 26.5% to 33%, largely due to the change in revenue mix with the higher margin sales of solar panels increasing” [This type of commentary draws the reader forward into the analysis] There is an analysis of operating profit in the report which is correct but not fully developed There was also an attempt to analyse the cash flow statement “The net cash available has more than doubled from £791k in 2009 to £1,658k in 2010 …the company also purchased less equipment in the year, with no purchases of motor vehicles in the year, only installation and call centre additions Again this is expected as the insulation project comes to an end” The judgement and conclusions are consistent with the analysis with both breadth and depth of commentary being sufficiently competent or clearly competent This is a good section of the report which demonstrates some good financial statement analysis skills To score better grades on Requirement 1, the candidate could have:   Provided a more detailed analysis of overheads and the operating profit Provided some more analysis of the cash flow statement such as the inflow from operations and more analysis of all working capital changes Proposal to expand into Australia [Requirement 2] The financial data analysis in this section is accompanied by appendices and 5, which provide a good numerical platform from which to comment on the project proposal – although these appendices contain calculations for each year when the requirement only asked for a total profit for the 5-year project [Perhaps the candidate’s thinking about the reason for performing these annual calculations is revealed by the comment in the report that no discounting has been done on the numbers – which is just as well because, as none was requested, no reward would be given for performing such a calculation Some sensible critical review is made of the assumptions provided: for example on the overall success on calls of 1:3 which is seen as being high The possibility of it being higher because of other factors is rejected “we are not convinced that the high proportion of internet connections will make any © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 higher success rate” However the critical analysis of the assumptions is incomplete because it requires a detailed analysis of each element of the calculation which is not given There is a logical approach to the start of the sensitivity analysis concerning success rates –the 1:5 success rate as achieved on the UK project is considered When the result of flexing the numbers to the new lower success rate produces a loss, the candidate rightly concludes that the success rate on calls is vital However despite this initial analysis, the candidate goes off on a slight tangent by considering the figure for commission earned per successful contract as being too low and suggests that “Compared to the UK project, the Australian project is only offering the equivalent of £100 per contract signed compared to the £200 previously Given that this was the main reason for high margins we recommend trying to use Jo’s negotiating skills to increase this to as close to £200 as possible This should enable the company to be more sustainable given reduced take-up rates” In further analysis of the loss created, the high fixed costs are questioned: “there seems to be little reasoning or calculation behind them… these fixed costs seem unrealistic”, but there is no absolute rejection of them in the decision making process Instead “we recommend analysing these fixed costs into those that can be directly attributable in order to get a more realistic figure for the projected profit” This is quite close to the required thinking of “contribution” analysis but unfortunately the final link is not made The detail and commentary on the opportunities and threats covers only some of the necessary topics but is not fully developed by critical analysis One notable error under threats is the statement that “The movement in the exchange rate is a threat If the Australian $ strengthens against the pound, EEE would end up receiving less money and the margins would come under increased pressure” The reverse is true; because local revenues are significantly greater than local costs, if the Australian $ strengthens against the UK £ then EEE would benefit from any increase To score better grades on Requirement 2, the candidate could have:    Made a more logical critical analysis of each of the assumptions relating to the Australian project Critically evaluated the project in terms of contribution rather than overall “profitability” Evaluated more critically the opportunities and threats surrounding this project Strategy for increasing revenue from solar panels [Requirement 3] This candidate plunges directly into the benefits relating to the solar panel business and unfortunately produces a muddled first paragraph After mentioning the high margin on solar panel sales – a good link to the analysis under Requirement – the remainder of the paragraph does not follow a logical pattern The second paragraph identifies the current key driver in the solar panel market – the UK government incentives However this point should have been linked with the final paragraph in this section which states “There is also expected growth in this market, 500% growth expected in 2011and in 2012 This is likely to increase as energy prices increase, 33% higher in 2020 than they are today” – which should be the major long-term factor in increasing sales of alternative energy products – but this point is not fully developed There are further lapses in logic on the other point raised as benefits – which may indicate that the candidate was under time pressure to finish the report The section on risks contains elements of correct thinking but also some erroneous analysis: “the FIT rates may rise below the energy price increases and specific power company charges This would have the effect of reducing an investor’s return on his investment” In fact it would have no effect on any “return on investment” for an investor once the original decision has been made and the effect of having an alternative energy supply would always continue to mitigate any increase in energy prices © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 The candidate also recommends “lobbying the government for more fixed commitment to the scheme” in order to maintain the solar panel market (and its profitability for EEE) which might be hard to justify under normal circumstances and virtually impossible in these straightened economic times A number of ethical issues are suggested by the candidate but, although each of the issues is relevant to a degree, the points made are somewhat bland “There is also an environmental concern with the Vietnamese supplier and the use of non-renewable products It is important for the image of EEE to be seen as environmentally friendly Therefore the claims in the article should be checked and if correct we recommend using only environmentally friendly suppliers” To score better grades on Requirement 3, the candidate could have:    Provided a more full and logical analysis of the economic benefits for EEE of the solar panel business Provided a more detailed review of the risks as identified by the directors and the news articles throughout the case Made better use of the articles in the Advance Information and the Exam Paper as well as the comments by directors in identifying the specific ethical issues surrounding this industry Appendices Appendix 1, 2, all relate to Requirement and are a series of well laid columnar analyses of the summarised EEE income statement extracts for 30 September 2010 compared with 2009 The analysis of movements between the years is made in both absolute and percentage terms, and in the section on revenue (Appendix 1) a clear analysis of sales mix has been calculated In Appendix the detailed calculations of gross profit for each business activity and overall provide evidence of good understanding of the required numerical analysis, with absolute and comparative numbers provided In Appendix the analysis of operating profit indicates that the candidate understands that simply calculating the operating profit percentage, which gives the same figure for both years, requires further work and analysis These are clear, relevant working documents which provide a good basis for the written analysis written in the body of the report Appendix This appendix relates to Requirement – the Australian project – and is almost entirely correct apart from the use of 10% rather than the strictly correct 9.545% as the call centre cost percentage However it was full of unnecessary detail because the calculation for each of the individual years was not required; only the total for the 5-year project was asked for This additional work must have cost this candidate a lot of time – and did not gain him/her any extra marks Apart from the rounding difference a correct total local “profit” has been calculated as well as the final UK profit Appendix This appendix also relates to Requirement and is the sensitivity analysis for the Australian project Here the detailed annual calculations are more difficult to follow – and appear in places wrong This schedule would definitely have benefitted by being a total calculation – it would have been easier to calculate and to follow However the sensitivity principle being used is correct in that the original calculation is being flexed downwards using the lower UK success rate of 1:5 rather than the 1:3 suggested in the case With the provisos above, these appendices demonstrate that the candidate knew what had to be done and provided the numerical evidence from which to write some clear analysis This numerical work demonstrated a sufficient level of competence Overall paper This was a well structured answer which followed a logical format in answering the detailed requirements There were a few lapses in style including the use of the first names of directors in the executive summary, but overall the language used was appropriate The report was balanced appropriately between the three sections and also clearly written with the target audience in mind with © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 good financial explanations where needed and no unnecessary facts provided to the board concerning their business The clearly competent grades in this overall topic reflected the result for the script as a whole © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 ILLUSTRATIVE SCRIPT REPORT ON THE PERFORMANCE AND FUTURE STRATEGY OF EEE FOR THE BOARD OF DIRECTORS BY GUNTER JENSEN LLP © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 Executive Summary This report aims to give an assessment of the company’s performance in 2010 and to also review and evaluate the future strategic options available to the company Review of management accounts Although trading results were down during the year, with operating profit decreasing 34% to £888k it was still a successful and positive year for the company, especially considering the remaining life of the insulation project The Revenue for EEE decreased by 34% to £9,949k in 2010 This was due to the expected reduction in revenue coming from the commissions and installations revenue, however this was offset to a degree by the 131% increase in solar panel revenues, which leapt form £1,085k to £2,510k The gross profit, which is closely linked to Revenue also decreased during the year, 16.4% to £3,347k in 2010 This decrease is lower than the decrease in revenue due to the increase in solar panel sales which have a much higher gross profit margin (56%) The change in sales mix which now shows that this product accounts for 25% of revenue means EEE are making better margins Gross profit margins increased from 26.5% to 33.5% because of this The operating profit decreased, as mentioned above, yet due to the change in sale mix the operating profit margin of 8.9% was able to be maintained There has also been a significant increase in cash in the period, with the decrease in receivables combined with the reduction of asset additions causing the company to have £1.5 million cash at the end of the year Analysis of proposed expansion to Australia Given the initial figures the expansion to Australia seems like a positive and realistic proposal given that it makes a projected profit of £2.6 million (App 4) The assumptions that have been made are open to scrutiny however, as the conversion rate of in calls especially seems high given the take-up rate EEE experienced in the UK With this conversion rate, the project gives a loss of £1.3 million for the year period (App 5) There are however further assumptions which affect this projected figure such as, for example, the fixed costs appear to have no backing for the numbers We therefore recommend that further analysis is done in order to come up with a reasonable assessment There are opportunities with this expansion It allows EEE to make use of the experience that Bernie and Len have in this area It also allows for the company to replicate, and where possible improve, the excellent business model they have in the UK There are also risks within this project, with the chief threat being the trading in a foreign currency and the exchange risks this brings with it These risks are able to be mitigated with the use of hedging to minimise any exposure to the movement in exchange rates We would recommend that the company looks to expand into this market as it has the necessary expertise and experience to make it work, however it seems vital to the success of this project that they are able to negotiate an increase in the amount they receive per contract Economic benefits and risks to the solar panel business There are both benefits and risks to this business however in our opinion the benefits outweigh the risks and it is a strategy that should be pursued alongside the international expansion to Australia The solar panel market is one which provides good margins and therefore will give a good return on investment Coupled with the increase in the potential market which could be available in low income households this appears to be a very attractive proposition There are also risks however, especially with the risk that the government incentive and support of the FIT scheme will be reduced in the future This could be quite devastating and would severely reduce the available © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 moment for EEE Therefore we recommend lobbying the government to ensure that their support for this project does not diminish There are also ethical issues relating to the solar industry The publics’ perception of solar panel installers and the promises that companies make are under scrutiny with bad press and negative PR The industry could face reduced demand for the products We recommend guarding against this by initiating good training and supervision of work and also trying to communicate with customers, jargon free Review of EEE’s management accounts for the year to 30 September 2010 Overall the company has had a less successful year than in 2009 with operating profit down by £436k, however this still gave a healthy profit of £880k in a difficult time for trading and with the insulation market moving towards the end of its projected life Revenue Revenue overall decreased by 34% (App 1) from £15,134k in 2009 to £9,949k in 2010 This seems to be mainly due to the decrease in revenue coming from the installation and commission business, which is to be expected considering the limited market that EEE have available to them in East Anglia Commission revenue has decreased by 45% (App 1) to just £1,354k, as only 6,770 contracts were signed during the year, compared to 12,520 in 2009 This brings the total contracts up to 53,295 during the project (and this is nearly 90% of the total estimated market at the beginning of the project.) Therefore this revenue stream will produce very little going forward and we recommend looking at alternative revenues The installation revenue follows a very similar pattern with a slight lag due to the installations happening after the contract They have decreased by £5,379k during the year, a reduction of 50.5% to just £5,259k These revenues now account for 52.9% of total revenue compared to the previous year, suggesting that while they remain a large part there are other growing areas within the business The solar panel revenue is the significantly growing revenue stream with an increase in sales of 131% from £1,085k in 2009 to £2,510k in 2010 Just as significantly this now accounts for 25.2% of total sales compared to just 7.2% in 2009 The growth of this market has been due to a need for new renewable energy sources and the government increase in funding through the FIT scheme incentive Stove revenue has decreased slightly during the year, from 910k to 826k, a movement of 9.2%, however this is not likely to grow and will probably slowly decline in the coming years as fashions change Gross Profit (App 2) The total gross profit for the year has decreased by 16.4% from £4,005k in 2009 to £3,347k in 2010 Although the absolute figure has gone done however, the margin has increased from 26.5% to 33%, largely due to the change in revenue mix with the higher margin sales of solar panels increasing The commission gross profit has decreased by 50%, from £2,265k to £1,129k This is due to the call centre direct costs remaining roughly the same, their employees still need to be paid even if the take-up of insulation decreases, however the decrease in the sales has caused this slump Installation gross profit has moved from £663k to £384k, a 42% decrease in 2010 The cost of sales rise or fall in direct relationship to the revenue, although there has been a slight increase in the Gross Profit margin, likely to be due to the company’s installers having a bit of spare capacity and therefore using the subcontractors less We would recommend going forward that using less sub-contractors in the final year of this project would increase margins and compensate the lack of sales The solar panel gross profit has increased dramatically, as expected given the increase in sales The profit margin has been maintained and stands at 56.6% in 2010, with the increase of £804k making gross profit £1,421k for the year Once again the stove gross profit has remained constant Operating profit Operating profit for EEE has decreased by 34% in 2010, a movement of £463k to a total of £888k © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 This still gives an operating profit margin of 8.9% which has been maintained in the year due to the increase in solar panel sales compensating for the lack of contract commissions Therefore the business has still done very well in order to gain this sort of result in an economic downturn when others are struggling Cash Flow Statement There has been a significant increase in cash during the period, and the company now has substantial cash reserves The net cash available has more than doubled from £791k in 2009 to £1,658k in 2010 The main reasons for this increase are that the receivables figure has decreased significantly, meaning that the outstanding money has been collected and reduced The company also purchased less equipment in the year, with no purchases of motor vehicles in the year, only installation and call centre additions Again this is expected as the insulation project comes to an end Finally the directors took lower dividends, meaning they have left higher amounts of cash in the business to enable future investing activities Analysis of Dany Parker’s proposal Project’s Profitability Using the figures provided by Dany Parker, the project stands to make a profit of £2.6 million over the years (App 4) This starts with a projected loss in the first year of £310k, mainly due to the UK fixed costs of £1.3 million per year This projected figure is without discounting the numbers in order to give a more representative value as the company’s discount rate is not known, however we would recommend re-running this calculation using a discount rate in order to get more realistic numbers Assumptions made It is worth assessing some of the assumptions that Dany has made Dany assumes a conversion rate of calls to contracts of in This seems to be high as in the UK, only in calls were converted, so there may be factors that have not been taken into account when calculating this figure For example, if there is a grant available for doing it yourself, there may be more than 20% of people doing that We recommend re-doing the analysis using a in conversion rate The assumption of the number of signed contracts in the first year also look quite ambitious as they are double the number of contracts that EEE had in the first year, however this is linked to conversion of calls too We are not convinced that the high proportion of internet connections will make any higher success rate We believe that direct marketing and calling is likely to be the most efficient way of contacting these people Sensitivity Analysis Given our concerns over the optimism of the forecasts, we have included a sensitivity analysis of the project using the UK take up rate of in This actually gives a loss for the period of £1,382 mill (App 5) This analysis suggests that the conversion rate of calls to contracts is going to be vital This is probably due to a couple of main factors Compared to the UK project, the Australian project is only offering the equivalent of £100 per contract signed compared to the £200 previously Given that this was the main reason for high margins we recommend trying to use Jo’s negotiating skills to increase this to as close to £200 as possible This should enable the company to be more sustainable given reduced take-up rates © The Institute of Chartered Accountants in England and Wales 2010 Page of 13 The large fixed costs from the UK also have a large effect on the profit, and there seems to be little reasoning or calculation behind them Given that the main costs will be sub-contractors and call centres, these fixed costs seem unrealistic We recommend analysing these fixed costs into those that can be directly attributable in order to get a more realistic figure for the projected profit Opportunities to EEE of expansion into Australia The major opportunity is that they will be performing a project almost identical to that which they have done successfully in the UK This should give them a profitable business for the next few years, and if anything should be more efficient and effective given their increased knowledge of the sector Another opportunity would come from potentially introducing their solar panel business into Australia If the insulation is successful and the EEE name becomes well known then they may be able to introduce solar panel installation This would seem to make sense given the climate and sunshine available in Australia There is also the opportunity to keep the UK call centre open and make use of this facility This would reduce redundancy or closure costs and enable the company to keep existing employees happy There could be a positive movement on the exchange rate, meaning that the money we receive is greater, however this is more likely to be a threat than an opportunity There is also an opportunity to use the experience of two of the directors Both Bernie Zhang and Len Wozniak have experience of the country and the sector and so it would seem sensible to use this resource to expand this way Threats to EEE We currently have very little information about the potential competition in Australia, there may already be companies set up doing what we want to Although this is mitigated to a degree by the link with VPS it would still be worth doing market research on the competition Although keeping the call centre open is an opportunity it could also turn into a threat One of the reasons for success in the UK was the use of British people to man the telephone calls, therefore will Australians react positively to the British accent? It may reduce the take up of contracts so to mitigate this we should think about using an Australian call centre The movement in the exchange rate is a threat If the Australian $ strengthens against the pound, EEE would end up receiving less money and the margins would come under increased pressure In order to mitigate this threat we recommend hedging against the change in foreign exchange, or maybe setting up an Australian subsidiary so the risk is less Conclusion Although there are risks with this project, we recommend that the company looks into developing this market as it has the necessary experience and expertise to make it work It is however of vital importance that the amount received per contract is increased as this is where the profit margins are made Economic benefits and risks relating to the solar panel business Benefits The current solar panel installation market is giving them margins of 56% in 2010 and is therefore a positive contribution This is due to the high costs involved, with the solar panels often being sold for over £10k and the low costs EEE has in installing these products This margin will also give the directors a much better return on their investments Another economic benefit is that the solar panel industry has government schemes invested in it This gives the company a degree of certainty that there will always be money invested in it, even if this does reduce in the future This can allow them to enter the market with less fear of failure © The Institute of Chartered Accountants in England and Wales 2010 Page 10 of 13 Another benefit comes from the proposed strategy to target the lower income households, possibly in partnership with “solar energy generating companies” This gives EEE a much broader market that they can sell to, as currently only the high income members of society can really afford them With a broader market they should increase revenues, and if working alongside a partner company they can this with less risk attached There is also expected growth in this market, 500% growth expected in 2011and in 2012 This is likely to increase as energy prices increase, 33% higher in 2020 than they are today Risks There is a risk that although the FIT scheme is government approved, they may be reducing the commitment that they currently have in place This would decrease the market that EEE has available and could lead to reduced revenue It is hard to mitigate this risk, but EEE should aim to get some commitment from the government for the long-term protection of the FIT scheme, perhaps lobbying them alongside other companies if this is necessary There is also the secondary risk that even if the FIT scheme remains in place, in full, the FIT rates may rise below the energy price increases and specific power company charges This would have the effect of reducing an investors return on his investment The Times online estimated that this could be a 10.7% with payback in as little as years, however if energy prices increase significantly then this return will decrease and payback takes longer This risk is hard to mitigate however we again recommend lobbying the government for more fixed commitment to the scheme A further risk could be from the reduction in supply of solar panels As demand increases EEE have been forced to source from alternatives and this could force the price up This would put additional pressure on the company’s margins We recommend sourcing a range of suppliers and using the cheapest where possible, forcing the companies to compete on price There is also economic risk as the working capital requirement for the solar panel industry is much higher than the insulation industry This should be manageable given the companies cash situation and this will reduce this risk Ethical Issues The solar panel business seems to have quite a negative image The quality of installation work and the qualifications of installers have come under scrutiny in press articles Although this does not directly link to EEE we recommend that all EEE installers are fully qualified and the firm keeps detailed training records As with the sub-contractors in the insulation business, the use of supervisors could be encouraged to ensure the work is kept at the highest level There is also an issue with the accuracy of energy savings that are to be made through the installation of solar panels If the public became sceptical about the levels of saving they may be less inclined to invest Therefore we recommend using ‘jargon free’ language and trying to quantify the amount an individual could save perhaps by using examples of previous customers Quality concerns are in place over the Vietnamese sourced solar panels If they are not of the highest quality people will resent paying the same price and they deserve good quality items We therefore recommend checking and monitoring these solar panels when they arrive and informing the supplier of any problems There is also an environmental concern with the Vietnamese supplier and the use of non-renewable products It is important for the image of EEE to be seen as environmentally friendly Therefore the claims in the article should be checked and if correct we recommend using only environmentally friendly suppliers © The Institute of Chartered Accountants in England and Wales 2010 Page 11 of 13 Appendix Revenue Revenue Revenue Mix 2010 2009 13.6% 16.5% Commissions 2010 1,354 2009 2,504 Movement (1,150) % Movement – 45% Installation 5,259 10,636 (5,376) –50.5% 52.9% 70.3% Solar panels 2,510 1,085 1,425 131% 25.2% 7.2% 826 910 (84) –9.2% 8.3% 6.0% 9,949 15,134 (5,185) –34% Alternative Energy stoves Total Appendix Gross Profit 2010 Commission Revenue Commission COS Commission Gross Profit % 1,354 (225) 1,129 Installation Revenue Installation COS Installation Gross Profit % 5,259 (4,875) 384 Solar Panel Revenue Solar Panel COS Solar Panel Gross Profit % 2,510 (1,089) 1,421 Stoves Revenue Stoves COS Stoves Gross Profit % 826 (413) 413 GP% 2009 GP% Movement % Movement 83% 2,504 (239) 2,265 90% (1,136) – 50% 7.3% 10,635 (9,972) 663 6.2% (279) – 42% 56.6% 1,085 (468) 617 56.9% (47) 130% 50% 910 (450) 460 50.5% (47) – 10% 15,134 (11,129) 4,005 26.5% (658) – 16.4% Total Total Revenue Total COS Total Gross Profit 9,949 (6,602) 3,347 33.6% Appendix Operating Profit 2010 2009 Movement % Movement Operating Profit 888 1,351 (463) – 34% 8.9% 8.9% Operating Profit % © The Institute of Chartered Accountants in England and Wales 2010 Page 12 of 13 Appendix Profitability of future project 2011 $’000 2012 $’000 2013 $’000 2014 $’000 2015 $’000 TOTAL $’000 Commission Revenue (signed contracts x $200) 2,400 4,800 5,600 4,400 2,800 20,000 Installation Revenue (installations x $600) 6,000 12,000 14,400 18,000 9,600 60,000 Call centre costs (10% x commission Rev) Installation costs ($578 x no of installations) Fixed costs (240) (480) (560) (440) (280) (2,000) (5,780) (11,560) (13,872) (17,340) (9,248) (57,800) (400) 1,980 (400) 4,360 (400) 5,168 (400) 4,220 (400) 2,472 (2,000) 18,200 990 2,180 2,584 2,110 1,236 9,100 (1,300) (1,300) (6,500) 810 (64) 2,600 Change to £ at Exchange rate $2:1 UK fixed costs Total (1,300) (1,300) (310) 880 (1,300) 1,284 Total estimated profit = £2,600,000 Appendix Sensitivity Analysis Assume that in calls are successful, as per UK installation 2011 2012 2013 2014 2015 Signed contracts x 3/5 7,200 14,400 16,800 13,200 8,400 Installations 6,000 12,000 19,600 18,000 9,600 Contract Contribution (contracts x $200 x 90%) 1,290 2,592 3,024 2,376 1,512 132 264 431.2 396 211.2 (400) (400) (400) (400) (400) Installation Contribution (600 – 578) Fixed costs Total 1,028 2,456 3,055.2 2,372 1,323 Translated ($2:£1) 514 1,228 1,527.6 1,186 661.6 UK Fixed Costs (£) (1,300) (1,300) (1,300) (1,300) (1,300) (786) (72) 227.6 (114) (638.4) Total Total Loss = £1,382,800 © The Institute of Chartered Accountants in England and Wales 2010 Page 13 of 13 ... Fixed costs Total 1, 028 2,456 3,055.2 2,372 1, 323 Translated ($2: 1) 514 1, 228 1, 527.6 1, 186 6 61. 6 UK Fixed Costs (£) (1, 300) (1, 300) (1, 300) (1, 300) (1, 300) (786) (72) 227.6 (11 4) (638.4) Total... England and Wales 2 010 Page 11 of 13 Appendix Revenue Revenue Revenue Mix 2 010 2009 13 .6% 16 .5% Commissions 2 010 1, 354 2009 2,504 Movement (1, 150) % Movement – 45% Installation 5,259 10 ,636 (5,376)... 5 ,16 8 (400) 4,220 (400) 2,472 (2,000) 18 ,200 990 2 ,18 0 2,584 2 ,11 0 1, 236 9 ,10 0 (1, 300) (1, 300) (6,500) 810 (64) 2,600 Change to £ at Exchange rate $2 :1 UK fixed costs Total (1, 300) (1, 300) ( 310 )